Comments on Announcement 2004-71

Request for Comments on Revenue Procedure for the Staggered Remedial Amendment Period System

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Filed: December 22, 2004

notice.comments@irscounsel.treas.gov

The American Society of Pension Professionals & Actuaries (ASPPA) offers these comments in response to IRS Announcement 2004-71 (Draft).

ASPPA is a national society of retirement plan professionals. ASPPA’s mission is to educate pension professionals and to preserve and enhance the private pension system. Its membership consists of more than 5,500 actuaries, plan administrators, attorneys, CPAs and other retirement plan experts who design, implement and maintain qualified retirement plans, especially for small to mid-size employers.

I. General Comments

ASPPA commends the Internal Revenue Service (IRS or the Service) for soliciting comments regarding the Determination Letter (DL) program. On September 20, 2002, ASPPA submitted detailed comments on the first White Paper, and on September 2, 2003, submitted its second White Paper comments. ASPPA appreciates the opportunity to provide these comments on IRS Announcement 2004-71.

ASPPA has many comments on the Announcement. However, certain issues that are considerably more important to ASPPA than others are summarized below in order to emphasize their importance. The details of ASPPA’s position on these and other issues are found in Section II of this letter.

1.Pre-approved defined contribution plans that are approved in the first cycle should be permitted to include Roth 401(k) provisions. (See Section A, below)

ASPPA supports the proposed 6-year staggered remedial amendment period for pre-approved plans as set forth in Announcement 2004-71.

ASPPA recommends that if the staggered remedial amendment process begins with defined contribution plans, the Service should permit such plans to include Roth 401(k) provisions that are likely to be in high demand. It would be cumbersome and expensive to approve master and prototype (M&P) and volume submitter (VS) plans without such provisions, and then require that a good-faith or model amendment be adopted by an employer in order to utilize such provisions.

2. A rule similar to that which applied to GUST restatements should be used to determine which remedial amendment period applies to an employer’s plans. (See Section B, below)

Under the Draft, there will be different remedial amendment periods for employers using individually designed plans (IDPs) and those using pre-approved plans. Many plans are based on, but are not identical to, a pre-approved plan. Employers that adopt these plans should be deemed to be adopting the pre-approved plan when determining which remedial amendment period applies, both for the initial EGTRRA cycle and for all subsequent remedial amendment periods.

ASPPA recommends that the approach taken by the IRS for the GUST remedial amendment period be utilized. Specifically, an employer would be entitled to use the remedial amendment period for pre-approved plans if it (1) certifies an intent to use a pre-approved plan or (2) adopted a pre-approved plan, or was deemed to have adopted a pre-approved plan (even though a modification was made to such pre-approved plan). Without this rule, the full benefit of implementing the 6-year cycle for pre-approved plans will never be realized. The IRS will need additional resources for its plan reviews to determine what deadline applies to a particular plan, which will inevitably be unnecessarily complex.

3. Industry input should be sought prior to requiring any interim amendments. (See Section C, below)

ASPPA understands that the Service may require amendments in off-cycle years (e.g., when there is a legislative change).

ASPPA recommends that the Service seek industry input prior to issuing guidance mandating any interim amendments and/or prior to issuing any model or good-faith amendments to ensure that the process of amending plans is completed as efficiently as possible.

4. If all opinion and advisory letters for pre-approved plans will be issued on or about the same date, then it is critical that advance notice be provided once the review process has been completed. (See Section I, below)

ASPPA understands that the Service intends to issue all opinion and advisory letters for pre-approved plans on or about the same date.

If so, ASPPA recommends that prototype sponsors, mass submitters and practitioners be notified once the formal review of the plan has been completed. There should also be an expedited review process for mass submitters and national sponsors to ensure that there is adequate time to put into place any processes for updating employer plans. In addition, the advance notice would trigger the submission of any minor modifiers or other submissions that are based on a particular pre-approved plan.

5. When an employer that is otherwise entitled to use the 6-year cycle for pre-approved plans is not entitled to automatic reliance, a DL submission should not be required in order to use the 6-year cycle. (See Section N, below)

The Draft provides that in order to use the 6-year cycle for pre-approved plans, a request for a favorable DL is required if an employer does not have automatic reliance on the pre-approved plan.

ASPPA recommends that this provision be eliminated because it will result in a mandatory filing requirement for virtually all employers using a plan that is based on, but not identical to, a pre-approved plan, resulting in increased costs to employers and increased IRS submissions. In addition, it undermines the concept of a voluntary DL program.

II. Specific Comments

A. Pre-approved defined contribution plans that are approved in the first cycle should be permitted to include Roth 401(k) provisions.

ASPPA recognizes that the staggered remedial amendment process must be sufficiently flexible to deal with any unforeseen circumstances; however, beginning the cycle with defined contribution plans (rather than defined benefit plans) presents a unique concern. Specifically, EGTRRA added IRC §402A [Roth 401(k) provisions] effective for years beginning after December 31, 2005. There is likely to be high demand for this plan feature and it is important that the plans approved as part of the initial cycle be permitted to include Roth 401(k) provisions.

ASPPA recommends , if there is not sufficient guidance from the Treasury or IRS to permit opinion or advisory letters to cover such provisions, that the Service permit good-faith Roth 401(k) plan language to be included and that the Service delay any requirement to include more detailed provisions until the second 6-year cycle.

B. A rule similar to that which applied to GUST restatements should be used to determine which remedial amendment period applies to an employer’s plans.

Implementing the 6-year staggered remedial amendment period for pre-approved plans will result in a different remedial amendment period for employers using IDPs and those using pre-approved plans. It is therefore imperative that there be a concise and practical rule that may be applied by an employer to readily determine which remedial amendment period applies to a particular plan.

Many plans are based on, but are not identical to, a pre-approved plan. In some cases the modifications automatically result in an IDP (e.g., most modifications to an M&P plan result in an IDP). In other cases, the modifications do not result in a plan’s automatic loss of its pre-approved status (e.g., minor changes can be made to a VS plan without affecting the ability to submit the plan for a DL as a VS plan). Unless the Service clearly indicates when a pre-approved plan becomes an IDP for applying the remedial amendment period rules, employers, prototype sponsors and practitioners will have difficulty complying with restatement requirements.

Under Section 15.04 of the Draft, the Service proposes to implement a different rule for employers that adopt VS plans versus those that adopt M&P plans. Specifically, an employer that adopts a VS plan will be considered to have adopted a VS plan when determining the remedial amendment period regardless of the extent of any modifications made to the pre-approved plan. Conversely, if an employer modifies an M&P plan, the employer will not be considered an adopter for the cycle following the cycle in which the modification was made.

The approach taken by the Service for GUST restatements was clear and provided a standard that could be readily applied by an employer to determine the appropriate deadline. Under GUST, the remedial amendment period for pre-approved plans generally applied if (1) the employer certified an intention to use a pre-approved plan or (2) the employer had already adopted a pre-approved plan.

A key component of that rule was §19.06 of Revenue Procedure (Rev. Proc.) 2000-20:

Certain Employer Amendments Disregarded for Purposes of This Section – An employer that has adopted an M&P plan or a volume submitter specimen plan may have modified the plan in such a way that the plan, as adopted by the employer, would not be considered an M&P plan or a volume submitter plan. Nevertheless, for purposes of this section, such a plan will be treated as an M&P or volume submitter plan and will be eligible for the remedial amendment period extension provided by this section. For example, an employer may have adopted an individually designed GUST-related amendment to an M&P plan that would have caused the plan to be considered an individually designed plan under section 5.02 of Rev. Proc. 89-9. Despite the individually designed amendment, the plan will be treated as an M&P plan for purposes of this section. [Emphasis added.]

ASPPA recommends that the IRS adopt the same rule cited above for the new staggered remedial amendment periods. This rule should apply to all pre-approved plans and to all years (e.g., for M&P plans it should not be limited to just the cycle in which the modification is made). Not only will the adoption of this GUST procedure resolve the uncertainty discussed above with regard to employers that use modified pre-approved plans, but it will further the IRS’s goals in instituting the staggered periods. In particular:

1. Scarce resources: One of the primary goals of restructuring the DL program is to alleviate demand for the IRS’s scarce resources. If a plan is “based” on a pre-approved plan, acknowledging the fact that the plan is—in large measure—pre-reviewed will permit a faster, more efficient review of the plan. In addition, a failure to adopt the GUST remedial amendment rule to the rest of the DL program would require modified M&P plans to be submitted on a cycle that differs from the cycle for the pre-approved plan on which it is based, which also would make the allocation of IRS review resources harder to predict.

For example, assume an employer makes a modification to an M&P plan. If the remedial amendment period for IDPs applied, the remedial amendment period would be based on the employer’s taxpayer identification number. That IDP remedial amendment period would likely differ from the remedial amendment period that applies to the underlying M&P plan. If the employer were to submit the plan for a DL, the Service would need to base its review on the current Cumulative List (i.e., a more current list than that used to review the M&P plan). The effect would be that employers using a modified M&P plan would need to maintain a current plan document at all times and the IRS would need to be in a position to review such plans every year. Consequently, this would increase the workload for everyone, including the IRS.

2. The use of a “substantially similar” standard: There is no clear standard for determining whether a plan is “based” on a pre-approved plan. In addition, ASPPA does not support such a standard because it is too vague and will result in uncertainty about a plan’s status. It is difficult, if not impossible, to imagine an objective standard for determining whether a plan is “based” on a pre-approved plan or is “substantially similar” to a pre-approved plan. Adopting the GUST rule would result in less chance of an employer misunderstanding the compliance requirements.

3. “Flood gates” of abuse: Implementing the GUST rule for determining the appropriate remedial amendment period will not open the “flood gates” of abuse. There were no reported abuses of this rule with respect to GUST restatements. Furthermore, under the new staggered remedial amendment period approach, there is little to be gained by any abuse. Plans will need to be updated every five years under the IDP designed plan cycle and every six years under the pre-approved plan cycle. Any abuse extends the remedial amendment period by a mere year. On the other hand, the proposed vague standard or an overly restrictive rule that treats any modification to a plan as resulting in a conversion to an IDP will make the entire structure of the staggered remedial amendment periods more difficult to administer. If an employer can avoid this problem by executing a Certification of Intent to Adopt a Pre-Approved Plan, then treating VS plans differently from M&P plans will merely be a trap for the unwary.

C. Industry input should be sought prior to requiring any interim amendments.

The Announcement indicates that the Service is not contemplating the implementation of an annual plan amendment requirement; however, interim plan amendments might be required based on particular circumstances. ASPPA understands the IRS’s need to retain flexibility in this regard.

ASPPA encourages the Service to be circumspect in requiring interim amendments and to seek industry input prior to requiring such amendments. If the goal is to require amendments and submissions only at 5- or 6-year intervals, then each time interim amendments are required, that goal is undermined. Partnering with the private sector would be beneficial to all parties, especially where it results in minimizing the burden to employers.

D. Modifications should be made to the proposed structure of the draft.

The structure of the Draft needs to be modified. The proposed structure sets forth rules for IDPs (PART I) and rules for pre-approved plans (PART II); however, there are certain sections that are only found under PART I that should also apply to PART II. These include the following sections of the Draft:

1. Section 4.01, setting forth the general remedial amendment period rules that apply beginning with EGTRRA

2. Section 7, applying IRC §401(b) to future changes in qualification requirements

3. Section 8, extending the remedial amendment period to the end of each cycle

4. Sections 9.01, providing the five-year cycles and an extension of the EGTRRA remedial amendment period. (Section 14.01 provides for six-year cycles but does not specifically provide an extension of the EGTRRA remedial amendment period.), 9.02, 9.03 and 9.04

5. Section 10.05, allowing the Service to require interim amendments

6. Section 11, involving determination letters

7. Section 12, involving terminating plans

ASPPA can provide more detailed suggestions on how to restructure the Rev. Proc. and/or to provide a preliminary review of the revisions that the Service proposes to make.

E. The extension period for a remaining cycle should be lengthened from 12 months to 24 months.

Section 6.02 of the Draft provides that if there is a transaction described in Section 6.01 that results in a remaining cycle of less than 12 months, then the cycle is extended for 12 months and the following 5-year cycle will be shortened.

ASPPA recommends that the extension period for the remaining cycle be 24 months rather than 12 months. If this change is made, it would be more consistent with the transition rule in IRC §410(b)(6)(C).

F. In determining which cumulative list to use for the “off-cycle” submissions use the date the determination request was submitted should be used.

Section 10.03 of the Draft provides that if a plan is submitted for a DL in an “off-cycle” year, then the plan will be reviewed based on the Cumulative List that applies to plans filed “on-cycle.”

ASPPA recommends that this provision be clarified to provide that determining which Cumulative List to use is based on the date the determination request is submitted rather than the date of the actual review.

G. On-cycle submissions should be given priority review over off-cycle submissions.

Section 10.03 of the Draft provides that “off-cycle” submissions will only be reviewed after all “on-cycle” submissions have been reviewed.

ASPPA recommends that this provision be modified to provide that “off-cycle” submissions will have a lower priority than “on-cycle” submissions. To require that all “on-cycle” submissions be reviewed first would mean that an “off-cycle” submission made early in a year (e.g., February) would not be reviewed until after the current cycle has ended (the following January).

H. Model or good-faith amendments should be issued as part of the cumulative list in order to update terminating plans.

Section 12 of the Draft provides that terminating plans must be updated for all applicable laws and other qualification requirements.

ASPPA recommends that the Service issue model or good-faith amendments that can be used to update terminating plans. These could be provided as part of each year’s Cumulative List. In the past, the Cincinnati key district office provided sample language that could be used by terminating plans, and this was beneficial to all parties.

I. It is critical that advance notice be provided once the review process has been completed.

Section 14.01 of the Draft sets forth the schedule for submitting opinion and advisory letter requests for pre-approved plans. ASPPA has the following comments relating to this schedule.

1. The Service proposes an earlier submission deadline (October 31, 2005) for mass submitters because mass submitter plans take longer for the Service to review and because the Service intends to issue all opinion or advisory letters on or about the same date. However, issuing all approval letters at the same time leaves no incentive to submit plans earlier than the general deadline.

It is not clear what would happen if a mass submitter were to miss the October 31 deadline. A position requiring the loss of mass submitter status would be harmful to all parties. Presumably, prototype sponsors and VS practitioners that were planning to be word-for-word adopters would have to adopt other pre-approved plans or pay the full IRS user fees, the latter of which would also entitle them to make changes to the underlying plan. In either event, it would be costly for prototype sponsors and VS practitioners and significantly increase the number of pre-approved plans needing review by the Service.

ASPPA recommends that the October 31, 2005 deadline apply to both mass submitters and national sponsors. Furthermore , ASPPA recommends that by meeting the deadline, such plans would be afforded expedited review. If the earlier deadline is not met, there would be no expedited review process. Some parties may object to any preferential treatment afforded mass submitters and national sponsors. However, this preferential treatment had been provided in the past (e.g., with GUST updates) on the basis that a significant number of employers used these plans and therefore additional time is needed to prepare systems and processes for getting these plans updated.

2. If all opinion and advisory letters are to be issued on or about the same date, it is imperative that the Service provide advance notice (e.g., an e-mail or informal letter) when the review process for each plan has been completed. The purpose of the advance notice is to:

a. Provide lead time for the development of underlying software systems that may be used to prepare or administer the plan once final opinion or advisory letters are issued.

b. Trigger the preparation and submission of plans that are “based” on pre-approved plans (e.g., minor modifier or non-mass submitter plans).

J. A “placeholder approach” should be used when modification are made to a lead plan or mass submitter plan.

The general deadline for all submissions will be prior to the approval of any lead plans or mass submitter plans. Accordingly, it will be impossible for prototype sponsors and VS practitioners that intend to use a lead plan or mass submitter plan to determine as of the submission due date whether the submission should be made as a word-for-word adopter, a minor modifier or a non-mass submitter.

ASPPA recommends that the Service use a “placeholder” approach if a prototype sponsor or VS practitioner knows that modifications will need to be made to the lead plan or mass submitter plan. Under such an approach, the submission made by the general deadline would include user fees based on the best guess of what the status of the plan will be (e.g., minor modifier or non-mass submitter), and if applicable, just the front page of Form 4461. Once the review has been completed on the lead plan or mass submitter, the prototype sponsor or VS practitioner would need to review and make any necessary modifications to the final document. At that point, the modified document, the appropriate submission forms and any additional user fees would be submitted to the Service. Similarly, all prototype sponsors and VS practitioners should be afforded this same opportunity (i.e., to review the approved version of the lead plan or mass submitter plan and to change the status of a submission if it is determined that they need to submit a minor modifier or non-mass submitter plan).

K. Off-cycle submissions should be based on the cumulative list for all pre-approved plans for that cycle.

ASPPA recommends that Section 14.02 of the Draft be clarified to provide that if an off-cycle submission is made, the review will be based on the Cumulative List that was used for all of the pre-approved plans for that cycle. In other words, the only Cumulative List that would be used to review pre-approved plans would be the List used at the beginning of each 6-year cycle. This would ensure that all submissions of documents using a given pre-approved plan are treated similarly and would discourage the submission of pre-approved plans in off-cycle years solely to have a plan that is more current. Alternatively, this rule could be applied just to prototype sponsors under the minor modifier program. In that case, a current Cumulative List could be used for review for non-mass submitters.

L. Plan update deadlines should be clarified as to which cumulative list is to be used to determine “disqualifying provisions.”

Section 14.04 of the Draft provides that the announced deadline by which employers must update their plans “will be the end of the plan’s remedial amendment cycle with respect to all disqualifying provisions for which the remedial amendment period would otherwise end during the cycle.” This section should be clarified as to which Cumulative List is to be used to determine “disqualifying provisions” (i.e., the Cumulative List that was used to review the underlying pre-approved plan or the Cumulative List that would apply based on the status of the plan at the time the update is made).

For example, it is clear that for employers whose plans are identical to a pre-approved plan, the disqualifying provisions would be those covered by the pre-approved plan. However, if an employer were to make minor changes to a VS plan and submit the plan for a DL, it is not clear whether the disqualifying provisions would be determined based on the Cumulative List used to review the VS or whether it would be based on the Cumulative List currently being used for the review of IDPs.

1. ASPPA recommends that where the DL submission is treated as a VS plan (i.e., when the review is based on Form 5307), then the disqualifying provisions would be determined based on the Cumulative List used to review the underlying VS plan. As recommended in section K, above, the same Cumulative List would be used to review all VS specimen plans thereby ensuring that all DLs issued with respect to VS plans would have the same scope of reliance.

2. ASPPA recommends, for those plans that are based on a pre-approved plan but are submitted using Form 5300, that the employer (or its delegate) be able to select the scope of the DL. For example, a new question could be added to Form 5300 where the employer must indicate if the plan being submitted is based on a pre-approved plan. If the election is made, then the practitioner would be required to include the opinion or advisory letter for the pre-approved plan as well as delineate the modifications that had been made to such pre-approved plan. In this event the DL would be based on the Cumulative List that is being used to review pre-approved plans. If the election is not made, then the review and DL would be based on the Cumulative List currently being used to review IDPs. This would also be beneficial to the Service because the expiration date of the DL could then be determined using the cycle for IDPs.

M. New form “certification of intent to adopt pre-approved plan” should first be circulated to industry for feedback.

Section 15.01(2) of the Draft provides that the Service will issue a new form titled “Certification of Intent to Adopt Pre-Approved Plan.”

ASPPA supports the issuance of such a form, but encourages the Service to first circulate a draft, solicit industry feedback and address the ability to execute the form electronically.

N. DL submissions should not be required in order to use the 6-year cycle.

Section 15.02 of the Draft provides that under the pre-approved plan cycle, an employer must submit its plan for a DL if required for reliance.

ASPPA recommends that Section 15.02 of the Draft be eliminated. The primary consideration for deciding to submit a plan for a DL should be whether there is a desire to have reliance on the terms of the plan, not whether the employer is entitled to use the 6-year cycle. Furthermore, if this provision is retained, then virtually all employers that have adopted plans that are not identical to pre-approved plans would be required to submit their plans for a DL.

ASPPA supports the liberalization of the reliance rules (see the letter submitted on December 9, 2004, regarding VS plans) and believes that the concept of a “voluntary” DL program would be undermined by retaining Section 15.02. In addition, retaining such a rule would be counterproductive to the goal of the staggered RAP approach because it would result in an increase in the number of plans submitted for DLs.

This letter was prepared by ASPPA’s Plan Documents subcommittee of the Government Affairs Committee, Michael J. Finch, CPC, Chair, and primarily authored by Robert M. Richter, Esq., APM. Please contact us if you have any comments or questions regarding the matters discussed above.

Sincerely,

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