The IRS determination letter program and what to do about missing participants were among the topics the Employee Plans (EP) Subgroup of the IRS Advisory Committee on Tax Exempt and Government Entities (ACT) addressed in the general report it issued on June 7.
The American Retirement Association (ARA) figured in the report, which the ACT issued in connection with its 17th annual public meeting. The EP Subgroup said that in reviewing EP community comments concerning IRS instructions for the pre-approved 401(a) plan and 403(b) plan programs, it “found many of the changes suggested by the American Retirement Association in its comment letter to EP dated Feb. 23, 2016 offer practical ways to enhance the usefulness of the program. For example, adding IRC Section 457(b) plans to the existing pre-approved plan program would be very beneficial to the EP community.”
Determination Letter Program
The EP Subgroup conducted an analysis as a follow up to its 2015-2016 report in which it examined the major restructuring of the IRS determination letter program for qualified plans and its impact on the employee plans community. The report includes recommendations regarding the circumstances under which it may be appropriate for the IRS Office of Employee Plans, the part of the Tax Exempt and Government Entities Division (TE/GE) of the IRS responsible for qualified pension plans, to reopen the determination letter program under certain circumstances.
The report notes that the IRS and the Department of Treasury publicly acknowledged their willingness in Notice 2018-24 to consider a potential expansion of the determination letter program for a limited period.
The EP Subgroup says that it “continues to believe that an opportunity to receive an updated IRS determination letter serves as an important adjunct to the IRS audit program, and would play a major role in encouraging plan sponsors and plan administrators to regularly review not only their plan documents, but also plan operations, in preparation for periodic IRS filings.” It seeks to encourage the IRS to consider providing the determination letter service on a limited basis.
The subgroup’s recommendations regarding the determination letter program are as follows.
1. Confirm through easily accessible information sources, such as the IRS website and IRS presentations to EP community associations, that the plan sponsor or plan administrator may continue to rely on a favorable determination letter issued under the Cycle System regarding all plan language other than amended language, provided there has been no change in the law that would affect the portion of the plan that has not been amended.
2. Institute a new procedure to allow for a limited scope determination letter under which a plan sponsor or plan administrator could ask the IRS to review specified changes after a prior favorable determination letter has been issued. Under such a review process, the plan sponsor or plan administrator would identify specific language that had been adopted since the last determination letter, in a format similar to the manner used with Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans. The result, the EP Subgroup said, would be a limited scope determination letter that would cover only the specified changes that are submitted for review. The prior favorable determination letter for the plan would still be in effect for any provisions that had not changed since the prior favorable determination letter. This review could be limited to discretionary amendments, or could also be limited to amendments addressing items listed in the annual Required Amendments List.
The EP Subgroup says that it appreciates that there were challenges with the prior limited review program and a new limited scope review program may raise challenges. Accordingly, the subgroup says that it believes that there should be a way to add appropriate caveats to a new “limited scope” determination letter program that would require the requestor to identify any substantial effects that minor changes could have — and that if it did not, the requestor could not rely on the limited scope letter.
3. Allow submission of determination letter applications for plan amendments required by major business transactions, such as plan sponsor mergers and acquisitions, divestitures, joint ventures and bankruptcy proceedings, as well as for plan mergers and spin-offs. “Without access to the determination letter process,” warns the subgroup, “the parties to these types of transactions likely may require plan termination as a condition of closing the transaction in order to limit potential liability for a plan that has an outdated determination letter.” The EP subgroup says that while plan terminations were required as part of the closing requirements for transactions before the periodic determination letter program was eliminated, it is concerned that plan terminations will become even more common without the ability to obtain current letters for ongoing plans. It further suggests that expedited review process be made available because such transactions are often time-sensitive.
4. Allow submission of determination letter applications for plan amendments adopted to comply with requirements the IRS and Treasury publish annually as a required amendments list for individually designed plans that generally applies to changes in qualification requirements that become effective on or after Jan. 1, 2016. To facilitate the best use of the IRS reviewers’ time, the EP Subgroup recommends requiring that the plan sponsor or plan administrator include with the determination letter application a “redlined” version of the last plan document that was the subject of a favorable determination letter, marked to show the subsequent changes in response to the Required Amendments Lists.
5. Issue guidance that makes clear that if the only change in plan provisions is the name of the plan sponsor and/or the plan name, then the prior favorable determination letter can be relied upon by the “new” plan sponsor. Since it is necessary in certain situations for the plan to provide a copy of its most recent favorable determination letter, the IRS should implement a simple administrative process in which a new determination letter with the new name of the plan sponsor and/or the new plan name (bearing the date of the original letter) can be issued in such situations.
6. Allow submission of determination letter applications when a major change in the tax law applicable to tax-qualified plans, and provide model language for amendments to facilitate the review process in these cases.
7. Allow submission of determination letter applications for any plan that has had significant changes — including a major design change or a novel qualification issue — that the plan sponsor or plan administrator believes may represent a “material change” so that reliance on the most recent favorable determination letter is not appropriate. Also, the IRS should allow governmental plans access under this exception to the extent there are significant changes in state law significantly affecting the terms of a plan, the EP Subgroup recommends.
8. Expand IRS instructions for the pre-approved 401(a) plan and 403(b) plan programs by providing further guidance on the type of changes that would be considered "minor modifications.” in order to encourage conversion of individually designed plans to pre-approved plan documents when feasible. The EP Subgroup urges the IRS to consider further changes to make the pre-approved plan programs available as broadly as possible to the EP community.
9. The IRS should consider extending adoption deadlines under the pre-approved plan program, since more plan sponsors are now contemplating conversion to a pre-approved plan option. The subgroup notes that under current IRS rules, all pre-approved plan document providers must completely update their pre-approved plan documents and request new opinion/advisory letters from the IRS every six years. It adds that generally, plan sponsors operating under a pre-approved plan document must then adopt a new updated pre-approved plan within two years after the IRS issues its opinion/advisory letter for the pre-approved plan. “EP community feedback indicates that these two-year periods need to be extended or eliminated, because plan sponsors struggle to comply with the relatively short adoption period currently authorized,” the subgroup says.
10. Allow submission of determination letter applications upon the expiration of a stated period since the last favorable determination letter. There is a concern that the industry may need a more recent letter to establish tax-qualified status because a prior letter, although not technically expired, will be considered too stale to be relied upon. The subgroup suggests an alternative: allowing submissions upon the earlier of either: (1) a stated period; or (2) the adoption of 10 or more amendments to the plan. The subgroup adds, “the EP community indicated that any reasonable limitations on how many times a plan sponsor could utilize this process, such as no more than once in every five years, would be acceptable.”
11. Allow access to determination letters for certain plans that cannot currently fall within the pre-approved program limitations, such as multiemployer plans, governmental plans with statutory structures, hybrid plans and complicated employee stock ownership plans.
12. Stagger the deadline to submit determination letter applications that are not based on a transaction date. There are a number of methods that could be used to stagger the application deadlines more evenly throughout the IRS fiscal year, the subgroup says, and notes that it received comments that indicate that the EP community “would be willing to use any type of staggered filing program that might assist the IRS in its workload management, so long as access to the determination letter process was provided in some manner.”
The EP Subgroup examined compliance concerns for tax-qualified retirement plans regarding missing participants. “Missing participants present significant challenges,” says the subgroup, that affect plans of all sizes. And it notes that it is possible to lose touch with participants for a variety of reasons.
The EP Subgroup recommends the IRS issue further guidance to help in navigating the challenges missing participants pose and to help in complying with applicable law.
The subgroup’s specific recommendations are as follows:
1. Expand the scope of the TE/GE Field Directives to apply to plan distributions other than RMDs under Code Section 401(a)(9), including:
- distributions made pursuant to Code Sections 401(a)(31), 401(a)(14) and 411(a)(11);
- corrective distributions under EPCRS pursuant to Revenue Procedure (Rev. Proc.) 2016-51, such as a refund under Code Sections 415, 401(k) or 401(m); and
- distributions made to missing participants where a communication is not returned as undeliverable but the participant failed to respond to or take the requisite action needed to commence such distribution.
2. Modify the TE/GE Field Directives to clarify that if any communication was returned as undeliverable with no forwarding address, and if the plan sponsor is subsequently unable to locate a valid address for such a missing participant, the requirement under the TE/GE Field Directives to send a certified letter is waived because it would be imprudent to send a certified letter and/or check to an address known to be invalid.
3. Modify guidance and the instructions to the Form 5500 to make clear that sponsors should answer lines 4l of the Form 5500 Schedules H and I (“Has the plan failed to provide any benefit when due under the plan?”) based on the steps outlined in the TE/GE Field Directives.
4. Provide guidance and amend the instructions to IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to establish an automatic waiver from the IRC Section 4974(a) 50% excise tax on insufficient required minimum distributions (RMDs) if the plan sponsor has completed all of the steps outlined in the TE/GE Field Directives.
5. Provide guidance and amend the instructions to IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc. to provide direction on when Form 1099-R should be issued regarding distributions that remain uncashed.
6. Issue a field directive to EP examiners confirming that distributions for missing participants, as well as uncashed checks, may be forfeited subject to reinstatement pursuant to Treas. Reg. §1.411(a)-4(b)(6) and coordinate such guidance with the DOL.
7. Reopen the IRS Letter Forwarding Program under Rev. Proc. 2012-35 for locating missing participants because it is more effective to send official letters from the IRS; employees are reluctant to respond to letters from former employers given anxieties about spam, scams and fraud.
8. Provide support to the Treasury’s Office of the Benefits Tax Counsel to increase by legislation the dollar threshold under Code Sections 411(a)(11) and 401(a)(31) to an amount greater than $5,000. “In doing so,” says the subgroup, “plan sponsors will have a greater likelihood of being able to make more distributions of vested benefits to employees following their termination of employment without their consent, before they become missing participants.”
9. Support the issuance of inter-agency coordinated guidance with Treasury’s Office of Chief Counsel, the Department of Labor and the Pension Benefit Guaranty Corporation “as soon as possible.”