Category Archives: Determination Letters

Today in ERISA History

Jan. 7, 2002 – The IRS issues the Quality Assurance Bulletin on Interested Party Comments, FY-2002 No. 2. It clarifies the procedures the IRS will use when it receives comments from an interested party while processing a determination letter application.

Treas. Reg. 1.7476-1(b) generally defines an “interested party” as

    1. All present employees of the employer who are eligible to participate in the plan; and
    2. All other present employees of the employer whose principal place of employment is the same as the principal place of employment of any employee who is eligible to participate in the plan.

When an employer sponsoring a qualified plan files an application for a determination letter, part of that application must provide the IRS with satisfactory evidence that the employer has notified all interested parties that a determination letter application has been filed with the IRS and they have the right to comment on that application directly to the IRS or Dept. of Labor.

As part of this Quality Assurance Bulletin, the IRS provided copies of 4 letters which it sends to interested parties when they comment to the IRS about a plan.

IRS Updates Determination Letter Procedures for Multiple Employer Plans

After the Dept. of Labor issued Advisory Opinion 2012-04a, the IRS quietly updated the determination letter application procedure for multiple employer plans. On June 5, 2012, in updated section 7.11.7 of the Internal Revenue Manual, which expressly supersedes IRS Quality Assurance Bulletin 2007-1, the IRS explains the Rev. Proc. 2007-44 remedial amendment cycle for multiple employer plans.

In Rev. Proc. 2007-44, the IRS assigned all individually designed multiple employer plans to Cycle B. In this update, the IRS notes that the first Cycle B submission period opened Feb. 1, 2007 and closed Jan. 31, 2008. The second cycle B submission period, commonly known as B2 or Bsquared, opened Feb. 1, 2012 and will close Jan. 31, 2013, which may be the reason behind the IRS issuing this update.

In IRM 7.11.7, the IRS states that a determination letter application can be filed in the name of the lead plan only, or in the name of the lead plan plus some or all of the participating employers. IRM 7.11.7. defines a “lead plan” as “the plan submitted by the Lead Employer”. A “Lead Employer” is defined as “the employer who sponsors the multiple employer plan”. A “participating employer” is “any employer that participates in the multiple employer plan”.

If a determination letter application is submitted without a lead plan, the IRS will return it accompanied with a 1012 letter and a refund of the user fee. The 1012 letter will instruct the representative submitting the application to resubmit it, this time including a copy of the lead plan.

New IRS FAQ on New Form 2848

In March of 2012, the IRS revised Form 2848 Power of Attorney and Declaration of Representative. Today, the IRS posted a new FAQ on their website explaining the changes made to Form 2848. One of the changes made to Form 2848 by the IRS allows individuals representing taxpayers to enter their PTIN directly on the form below their CAF Number.

The IRS says they have stopped processing filings which include older versions of Form 2848 other than the Oct. 2011 version of Form 2848, and all applications which require Form 2848 should use the Oct. 2011 version or the March 2012 version.

Today in ERISA History

April 3, 2008 – The IRS issues Quality Assurance Bulletin FY-2008 No. 1 on Multiemployer Plans: Determination Procedures. It discusses how the IRS treats auxiliary documents, such as collective bargaining agreements, participation agreements, side agreements, and reciprocity agreements, for multiemployer plans who have submitted a determination letter application. It also discusses a variety of issues encountered by multiemployer plans, such as plan language, incorporation by reference, vesting, participation, and nondiscrimination.

Code section 414(f) defines a multiemployer plan as “a plan –

    (A) to which more than one employer is required to contribute,

    (B) which is maintained pursuant to one or more collective bargaining agreements between one or more employee organizations and more than one employer, and

    (C) which satisfies such other requirements as the Secretary of Labor may prescribe by regulation.”

Code section 413(b) describes how certain qualification and other rules apply to collectively bargained plans. Those rules are similar, but separate and distinct from Code section 413(c) which applies to multiple employer plans.

IRS Hosting Free Webinar on Friday, March 30, 2012 About Determ Letters

On Friday, March 30, 2012, from 2pm ET to 2:50pm ET, the IRS is hosting a free webinar on the recent changes the IRS made to its’ determination letter program. Don Keiffer, Area Manager in IRS Employee Plan Determinations, will be discussing the TEGE Advisory Committee’s final report containing its’ analysis of the IRS determination letter program, and the recent changes made by the IRS to the determination letter program in partial response to that report. Enrolled Retirement Plan Agents (ERPAs) can earn one CPE credit for attending the entire presentation. To attend, you must pre-register through the IRS’ website.

Target Benefit Plans: On the Edge of Extinction

One of the more interesting effects caused by the IRS’ elimination of the National Sponsor category in Rev. Proc. 2011-49 may be the projected elimination of pre-approved target benefit prototype and volume submitter plans. While some of you may be thinking “who cares” and others may be thinking “this will never happen”, let me share some analysis that may change your mind. Think of target benefit plans as the canaries in our coal mine of a plan document system.

Target benefit plans have never been wildly popular. They are designed to pay a targeted benefit at retirement (hence the name “target benefit plans”) funded by annual contributions. Even though target benefit plans combine some aspects of defined benefit plans with other aspects of defined contribution plans, the IRS classifies target benefit plans as defined contribution plans for purposes of the filing deadlines contained in Rev. Proc. 2007-44. This means that the deadline is Jan. 31, 2012 for filing prototype and volume submitter target benefit plans with the IRS for PPA Restatement opinion/advisory letters.

Rev. Proc. 2011-49, released by the IRS in Oct. of 2011, contains the filing instructions for PPA Restatement prototype or volume submitter plans submitted to the IRS for an opinion/advisory letter. One of the requirements contained in Rev. Proc. 2011-49 is that each master or specimen plan have 30 firms register as word-for-word adopters of that plan. The only exception to the 30 word-for-word sponsor rule is money purchase plans, which are required to have 10 word-for-word sponsors. The IRS created this exception for money purchase plans a number of years ago when EGTRRA’s contribution limit changes triggered merger-mania between profit sharing and money purchase plans, merging many money purchase plans out of existence. Rev. Proc. 2011-49 did not grant target benefit plans the same 10 word-for-word sponsor exception.

For plan document providers, the lack of an exception to the 30 word-for-word sponsor rule wasn’t much of a concern because they could rely on the National Sponsor category for receiving the opinion/advisory letters for their EGTRRA target benefit prototype and volume submitter plans. The National Sponsor category permitted an opinion/advisory letter to be issued to a master or specimen plan that did not have 30 word-for-word sponsors but the plan document provider could meet other criteria, including having adopters of that plan in at least 30 states. The National Sponsor category was popular for large banks and investment providers who write plan documents for a nationwide clientele but were not interested in finding 29 other firms to join them in sponsoring a plan document.

For target benefit plans, a review of the IRS’ list of prototype and volume submitter plans filed for EGTRRA defined contribution opinion/advisory letter reveal that every master and specimen target benefit plan depended on the National Sponsor category for an opinion/advisory letter. If the National Sponsor category has not existed for the EGTRRA restatements, all target benefit plans would have defaulted to using individually designed plan documents when restating for EGTRRA.

For example, only 14 master and specimen target benefit plans were submitted to the IRS for pre-approval as volume submitter plans. Of those 14 master and specimen plans, 6 were submitted by Corbel Relius (1), Datair (4), and Accudraft (1) and the remaining 8 were submitted for word-for-word sponsors of those 6 target benefit master and specimen plans. Due to the lack of 30 word-for-word sponsors of their EGTRRA volume submitter target benefit plans, Corbel Relius, Datair and Accudraft relied on the National Sponsor category to file their plan documents for opinion/advisory letters. If Rev. Proc. 2011-49′s elimination of the National Sponsor category had been in place on Jan. 31, 2006, when the EGTRRA defined contribution prototype and volume submitter plan documents were filed with the IRS, Corbel Relius, Datair and Accudraft would not have received opinion/advisory letters for their target benefit volume submitter plan documents.

Hopefully, the IRS will reconsider the elimination of the National Sponsor category and issue a revision of Rev. Proc. 2011-49 before the Jan. 31, 2012 deadline. If not, sponsors of target benefit plans can expect to see their determination letter filing fees increase from $300 for using a pre-approved document to $1,800 for using an individually designed plan document. And the IRS can expect to allocate personnel and many more man-hours to reviewing individually designed target benefit plans.

ERPAs and the PTIN Requirement – As Clear As Mud

Today, Nov. 3, 2011, the IRS issued Notice 2011-91 on Certain Enrolled Retirement Plan Agents Not Required to Obtain a PTIN. The notice is a short 2-pages long.

It states that the IRS intends to amend Circular 230 to remove the requirement contained in Section 10.4(b) that an individual who wants to become an ERPA, or renew their status as an ERPA, must have a valid preparer tax identification number (PTIN). Notice 2011-91 says effective immediately, ERPAs and applicants to become ERPAs are not required to have a PTIN to apply for enrollment or renew enrollment as an ERPA. ERPAs must still obtain a PTIN if, for compensation, they prepare, or assist in the preparation of, all or substantially all of any tax return or claim for refund that is not on the list of forms exempt from the PTIN requirement as provided in section 1.03 of Notice 2011-6 or any future guidance.

This is good news for the ERPAs, and good news for the industry. Notice 2011-91 does create one problem. It says

“Notice 2011-6 further provides a list of forms for which no PTIN is required. Among the forms included on this list are the Form 5300 and the Form 5500 series returns.”

Earlier this year, during a webinar hosted by the IRS, the IRS stated that Notice 2011-6 did not exempt the entire Form 5300 series from the PTIN requirements. I don’t think it is fair to quote statements made by IRS personnel during webinars because the webinars provide such a tremendous benefit to the ERPA community by providing great information along with free ERPA CPE credit for attending, and no one should be zinged for making a misstatement during a live presentation.

The problem here is that their statements during the webinar were very clear. Only three forms from the Form 5300 series were exempted from the PTIN requirement in Notice 2011-6 – Form 5300, Form 5307, and Form 5310 – and not the entire Form 5300 series. At that time, the IRS said it was considering exempting the entire Form 5300 series from the PTIN requirements, and would issue a new Notice or Revenue Procedure if and when this decision was made. I don’t think Notice 2011-91 can be read as that future guidance which exempts the entire Form 5300 series from the PTIN requirements.

Whether Form 5300 or the entire Form 5300 series has been exempted from the PTIN requirements is a non-issue until you need to file a determination letter application for a type of plan which includes a form from the Form 5300 series which was not excluded by Notice 2011-6. For example, Form 5309 is required as part of a determination letter application for ESOPs/KSOPs. Form 5309 is part of the Form 5300 series but it was not includes on the list of forms exempted from the PTIN requirements by Notice 2011-6, so do you need a PTIN to file a determination letter application for an ESOP or not.

ESOP/KSOP Determination Letter Backlog Here to Stay (for now)

Miracle on 34th Street mail
I was fortunate to attend the IRS phone forum on ESOP determination letters last Friday. The webinar was very good. The IRS addressed a number of outstanding issues, and provided some handy tips.

First, the IRS acknowledged that there is currently a lag between when the IRS receives an ESOP/KSOP determination letter application and when that application is reviewed by an agent. Despite their best efforts, the IRS is currently reviewing ESOP determination letter applications received in 2008 during Cycle C. According to the Form 5500 information posted on the DOL’s website, there are approximately 1,300 ESOP/KSOP plans required to be submitted to the IRS for a determination letter during each Rev. Proc. 2007-44 cycle, so unless something drastically changes, the backlog will continue to grow. Like a soldier in an old World War II movie peeling potatoes from a stack of potatoes that only continues to grow, each and every Jan. 31st adds another 1,300 applications to the already existing stack of determination letter applications waiting to be reviewed.

One option the IRS is currently exploring is opening an opinion/advisory letter program for ESOPs/KSOPs in 2018 (the beginning of the next restatement cycle). This would reduce the overall number of ESOP/KSOP determination letter submissions the IRS receives because some plans would have reliance on an opinion/advisory letter and would not be required to file for a determination letter.

Before you ask “why 2018″, think about the steps the IRS has to undertake to accomplish this under the current system stated in Rev. Proc. 2007-44. First, ESOPs/KSOPs are classified as a type of defined contribution plan. Under Rev. Proc. 2007-44, the deadline to submit DC plans for opinion/advisory letters is Jan. 31, 2012. This means that by Jan. 31, 2012, the IRS would need to amend Rev. Proc. 2011-49 to include ESOPs/KSOPs as plans which are eligible for opinion/advisory letters, issue LRMs for ESOPs/KSOPs (LRMs contain suggested language for writing plan documents), and update the opinion/advisory forms to include provisions unique to ESOP/KSOP plans, such as 1042 provisions and exempt loan language. Realistically, this means that the next 6-year cycle for DC opinion/advisory letters, starting in 2018, is the target date for adding ESOPs/KSOPs to the pre-approved plan program.

Imagine how quickly the stack of determination letter applications waiting to be reviewed would shrink if the IRS received approx. 325 applications each cycle instead of approx. 1,300 applications. This would require moving 75% of the existing ESOP/KSOPs on to pre-approved prototype or volume submitter plan documents, which is possible if the IRS commits to making two simple changes in the opinion/advisory program. First, the IRS returns the filing fee to the EGTRRA level of $4,500 per opinion/advisory letter (the current fee is $21,000+ per opinion/advisory letter). Second, the IRS reinstates the National Sponsor category or reduces the number of word-for-word adopters to 10 (the current number of word-for-word adopters required for an opinion/advisory letter is 30).

In the meantime, the IRS has created a webpage showing which plans they are currently reviewing. For example, if you mailed a Cycle D ESOP to the IRS for a determination letter in January of 2010, the odds are pretty good that the submission is sitting on a shelf somewhere waiting for an agent to be assigned to review the application. I’m finding this website to be a handy tool to set expectations with plan sponsors on how long the ESOP/KSOP determination letter process may take.

The good news is that once the plan is assigned to an agent for review, the IRS has created a group of highly trained agents within Employee Plans who only review ESOP/KSOP determination letter applications, so once the review process begins, it should proceed quickly and efficiently. The IRS recognized during the webinar that writing plan documents is a niche among ERISA attorneys, and within that niche, there is a smaller niche of ERISA attorneys that write ESOP/KSOP plan documents. Connecting the small group of ERISA attorneys who actually write ESOP/KSOP plan documents with the group of agents within Employee Plans who are devoted to reviewing those plan documents should speed the entire process up. And, as one of the ERISA attorneys who write ESOP/KSOP plan documents, I hope not only will it make the current process faster and more efficient, but will start a dialogue between the groups which will continue over the next six years and result in a smooth transition between the current process and an ESOP/KSOP opinion/advisory program in 2018.

Other handy tips are included in the handout material, including making sure to check that the determination letter application includes plan documents and amendments that are signed AND dated.

Free IRS Webinar about ESOP Determination Letters on Oct. 28, 2011

Tomorrow, Oct. 28, 2011, the IRS is holding a free webinar on ESOP determination letter applications from 2pm ET to 3pm ET. Even if you do not handle ESOPs, it is worth taking an hour to attend this webinar because some of the issues the IRS is finding in ESOP determination letter submissions are applicable to all determination letter applications submitted using Form 5300. It is not too late to register. You can register to attend through the IRS’ website here.

IRS Re-Interprets the Form 8717 Determination Letter Fee Exemption

magician's hat
On Oct. 20, 2011, the IRS issued Notice 2011-86, which re-interprets when a plan qualifies for exemption from paying user fees when filing a determination letter application. With the recent IRS increase in user fees for determination letter applications (individually designed plans including Demo 5 or Demo 6 in their determ letter application now pay $4,500 in filing fees for the determ letter application), plan sponsors are finding that qualifying for the exemption is more important than ever.

The exemption was created by Section 620 of the Economic Growth and Tax Relief Act of 2001 (EGTRRA) and allows plans that meet certain conditions to obtain a determination letter application without paying the filing fee for that determination letter application.

First, the plan sponsor must be an “eligible employer” for purposes of the exemption. “Eligible Employers” are defined as employers with:

    1. no more than 100 employees who receive a least $5,000 in compensation from the employer for the preceding plan year; and
    2. at least one non-highly compensated employee (NHCE) participating in the plan.

Second, the application must be filed by the later of the last day of:

  • the fifth plan year of the plan’s existence, or
  • any remedial amendment period for the plan that begins within the plan’s first five plan years.

It was the “remedial amendment period” condition which the IRS has reinterpreted. Prior to Notice 2011-86, the remedial amendment period could stretch back pretty far. The draft instructions to the most recent version of Form 8717 (May 2011) state:

“Under section 620 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), an application for a defined contribution plan from an eligible employer for a plan that was first effective on or after Jan. 2, 1997, will automatically meet this requirement. An application for a defined benefit plan from an eligible employer for a plan that was first effective on or after Jan. 3, 1996, will automatically meet this requirement.”

Notice 2011-85 changes this. The IRS says the “Service will treat an application as having been filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if both of the following conditions are met:

    1. the application is filed with the Service by the last day of the submission period for the plan’s current remedial amendment cycle; and
    2. the plan is first in existence no earlier than Jan. 1 of the tenth calendar year immediately preceding the year in which the submission period for the plan’s current remedial amendment cycle begins.”

The IRS applies this change to the information contained in the instructions to Form 8717 as:

“The service will treat an application for a determination letter for a Cycle A plan as filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if the application is filed with the Service by Jan. 31, 2012 (i.e., the last day of the submission period for the plan’s current remedial amendment cycle) and the plan is first in existence no earlier than Jan. 1, 2001 (i.e., Jan. 1 of the tenth calendar year immediately preceding 2011, the year in which the submission period for the plan’s current remedial amendment cycle begins). An application for a determination letter for a Cycle B plan will be treated as filed by the last day of a remedial amendment period with respect to the plan beginning within the first five plan years if the application is filed with the Service by Jan. 31, 2013, and the plan is first in existence no earlier than Jan. 1, 2002.”