Category Archives: IRS

A Little Tax Day Humor

april 15

tax day

Found this gem in the 2013 Form 1040 Instructions for Line 6c – Dependents:

“A qualifying child is a child who is…under age 19 at the end of 2013 and younger than you

    - page 17 of 207

Even though it should be, the page reference is not a typo – the Instructions for Form 1040 are 207 pages long this year, and they do not include the Instructions for various Forms and Schedules which a taxpayer may be required to file along with their Form 1040.

New IRS Amendment Info on Supreme Court’s Decision on Same-Sex Marriage for 401k’s

On Friday (April 4, 2014), the IRS issued Notice 2014-19, addressing how the U.S. Supreme Court’s decision on same-sex marriage in U.S. v. Windsor and IRS Rev. Rul. 2013-17 affects retirement plans and pension plans, including 401(k) plans. Notice 2014-19 is 7 pages long.

Last year, When the IRS issued Rev. Rul. 2013-17, the Service left a number of questions unanswered for qualified plans, including how far back Windsor should be applied, and whether plan sponsors need to adopt an amendment to comply with Windsor. This led to a lot of debate, especially over whether, when and how plans should/could/must apply Windsor retroactively. After all, when the U.S. Supreme Court decides something is unconstitutional, and has always been unconstitutional, that ruling normally applies back to the inception, not to a specific date. As a practical matter, which is not suppose to factor in when correcting unconstitutionality, asking retirement and pension plans to review every distribution, loan, and spousal consent obtained since the Defense of Marriage Act was signed into law in 1996, and making correcting distributions when warranted, would be an immense burden on our industry (again, how difficult, time-consuming and expensive for an industry to correct an unconstitutionality should be irrelevant).

In Q&A-2 of Notice 2014-19, the IRS tells us that “a retirement plan will not be treated as failing to meet the requirements of section 401(a) merely because it did not recognize the same-sex spouse of a participant as a spouse before June 26, 2013″. I’m not sure what the federal court system will do with this pronouncement, but it is what the IRS has given us to work with for now. I think best practices for any qualified plan this year is to update all spousal consents and beneficiary forms.

As for if/when amendments must be adopted, Q&A-8 of Notice 2014-19 says “the deadline to adopt a plan amendment pursuant to this notice is the later of (i) the otherwise applicable deadline under section 5.05 of Rev. Proc. 2007-44, or its successor, or (ii) Dec. 31, 2014.”

On May 8, 2014 from 2pm to 3:40pm, we are holding a live web seminar to discuss Notice 2014-19. We have divided this seminar into 2 parts of 50 minutes each to allow attendees to earn 1 CE credit if they want to attend only 1 part.

In Part 1 of this live web seminar, we discuss the requirement of Q&A-8 of Notice 2014-19 which states that some plans may need to adopt an amendment by the later of: (1) the deadline under section 5.05 of Rev Proc 2007-44; or (2) Dec. 31, 2014, including discussing how to determine what plans may need to adopt this amendment, the deadline to adopt the amendment, how to determine which deadline applies, what a sample amendment may say, and how the restatement period which just started for defined contribution plans affects this amendment since the language in IRS pre-approved PPA prototype and volume submitter defined contribution plan documents was approved prior to the release of Notice 2014-19.

In Part 2 of this live web seminar, we discuss how IRS Notice 2014-19 addresses various issues which the IRS states the decision in Windsor caused for qualified plans, including discussions of Internal Revenue Code section 401(a)(11) qualified joint and survivor annuities (QJSA) spousal consent rules; the spousal consent rules of Code section 417(a)(4) for plan loans; the spousal consent rules of Code section 401(a)(11)(B)(iii) for designating a beneficiary for purposes of QJSAs and QPSAs; the surviving spouse rules for required minimum distributions under Code section 401(a)(9); and the attribution rules of Code section 1563(e)(5) for determining whether a spouse is treated by the IRS as owning shares owned by the other spouse for purposes of determining whether corporations are members of a controlled group under Code section 414(b).

The cost to attend our live web seminar on Notice 2014-19 is $50 for each individual, which includes both Part 1 and Part 2. Individuals registered for our 16 Credit Hours for $195 seminar package can attend as part of their package at no additional charge. Group packages are available.

You can reserve a seat in this seminar, or see what live web seminars we have coming up, here.

This seminar is 100 minutes long and is designed to meet ASPPA’s and NIPA’s requirements for 2 CPE credits. This IRS has approved this program for 2 CPE credits for Enrolled Retirement Plan Agents and Enrolled Agents.

IRS Extends Deadline for 403(b) Plan Documents

Yesterday, the IRS issued Rev. Proc. 2014-28, extending the deadline for plan document providers to submit applications to the IRS for pre-approval of prototype and volume submitter plan documents from April 30, 2014 to April 30, 2015. While this 1-year extension may not seem like much at first read, it is monumental.

First, for the tiny part of the industry which actually writes 403(b) plan documents, this change signals a sea-changing event. Not only does Rev. Proc. 2014-28 give plan document providers a little more time to submit their proposed prototype and volume submitter plan documents to the IRS for opinion/advisory letters, it also reduces the number of required sponsors from 30 to 15, perhaps signaling that the IRS understands how difficult it has been for the plan document provider community to get educational institutions and non-profits to buy-in to the IRS idea that if they want the advantages gained by utilizing pre-approved prototype and volume submitter plan documents, then some of them must step forward and bear the burden of sponsoring those documents. Rev. Proc. 2014-28 doesn’t say why the IRS feels 15 sponsors is the more appropriate number of sponsors, or why the IRS decided not to completely eliminate this requirement. Rumor has it that the IRS did not eliminate this requirement in its entirety because the Service is concerned about being flooded with applications for 403(b) opinion/advisory letters for prototype and volume submitter plan documents. Because Rev. Proc. 2014-28 did not reduce or eliminate the fee to submit these applications, which starts at $14,000, it is doubtful that this rumor is true.

Second, for the rest of the industry, it is not what Rev. Proc. 2014-28 says but what it doesn’t say, which is important. Remember, when the IRS imposed the written plan document requirement on 403(b) plans with the Final 403(b) Regulations, the Service created a remedial amendment period for 403(b) plan documents. That remedial amendment period ends when the first restatement period for pre-approved 403(b) prototype and volume submitter plan documents ends, so moving the submission deadline also impacts this remedial amendment period, which is something Rev. Proc. 2014-28 does not address.

Additionally, Rev. Proc. 2014-28 does not discuss whether/if/when 403(b) plan document will follow the 6-year defined contribution restatement cycle set forth in Rev. Proc. 2007-44. For small educational institutions and non-profits concerned with the cost of implementing and maintaining a 403(b) plan, the cost of periodically restating the plan document is an important part of the conversation.

We will discuss these issues in detail in our upcoming live web seminar “403(b) Plan Document Update 2014” on Thursday, May 15, from 2pm to 3:40pm ET. The cost to attend is $50 for each individual. Individuals registered for our 16 Credit Hours for $195 seminar package can attend as part of their package at no additional charge. Group packages are available.

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.

New IRS Defined Benefit Guidance for Plan Sponsors with Closed DB Plan and 401(k) Plan

At 10:10am ET this morning, the IRS issued new guidance for plan sponsors who sponsor both a “closed” defined benefit plan and a defined contribution plan. With so many state and local governments adopting these arrangements, or discussing adopting these arrangements, kudos to the IRS for tackling this issue in such a timely manner.

In Notice 2014-05, the IRS permits certain employers that sponsor a “closed” defined benefit plan and a defined contribution plan to demonstrate that the aggregated plans comply with the nondiscrimination requirements of Code section 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis.

Notice 2014-05 defines a “closed” defined benefit plan as a defined benefit plan that provides ongoing accruals but have been amended to limit those accruals to some or all employees who participated in the plan on a specific date. The IRS states that closing a defined benefit plan often occurs in conjunction with an amendment that provides new or greater contributions under a defined contribution plan intended to replace accruals under the defined benefit plan for new hires or other employees to whom the defined benefit plan is closed.

Notice 2014-05 is 7 pages long, and will be published on Jan. 6, 2014 in Internal Revenue Bulletin 2014-2.

District Court Says No to IRS About RTRPs, Are ERPAs, Enrolled Actuaries or EAs Next?

Almost a month has passed since the U.S. District Court of the District of Columbia issued its opinion about IRS Circular 230 on Jan. 18, 2013, and I’m a little surprised by the lack of discussion about this opinion in ERISA circles because it may be a game-changer when it comes to the IRS permitting non-attorneys to practice before the IRS.

In Loving v. Internal Revenue Service, No. 12-385 (Jan. 18, 2013), the U.S. District Court of the District of Columbia granted summary judgment to three paid tax return preparers who complained that the 2011 addition of section 10.3(f) to IRS Circular 230, creating the category of Registered Tax Return Preparer, would force them to close their businesses if they were forced to comply with Circular 230. Specifically, the Court enumerated the new Circular 230 requirements imposed on those three paid tax return preparers as “annual fees, the entrance exam, and the hefty continuing-education requirement”.

To those of us who practice before the IRS on a daily basis, complying with IRS Circular 230 is nothing new. In my History of Circular 230 class, I was taught that the IRS promulgated Circular 230 in 1966. According to the Court’s 22-page opinion, Circular 230 actually has its origins in an 1884 statute, 31 U.S.C. section 330, which “allows the IRS to regulate “representatives” who “practice” before it.” (quotation marks around “representatives” and “practice” provided by the Court).

Section 10.2(a)(4) of Circular 230 defines practice before the IRS as:

“(4) Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings.”

The Court stated the issue before it “turns on whether certain tax-return preparers are representatives who practice before the IRS, and thus are properly subject to the new IRS regulations.” (the new IRS regulations are the 2011 changes to Circular 230). Even though the three tax return preparers are in the business of preparing and filing IRS Form 1040s for unrelated taxpayers, the Court found that they are not representatives who practice before the IRS, and thus were not subject to the new IRS regulations.

According to the Court’s opinion, the IRS argued that “each agency has inherent authority to regulate those who practice before it.” Unlike most agencies, who permit only attorneys to represent the interests of unrelated parties, the IRS has always taken a more pragmatic approach, permitting non-attorneys to represent the interests of unrelated parties before the IRS based upon criteria stated in Circular 230. For example, many years ago, the IRS recognized that Enrolled Actuaries bring a unique understanding to the application of 22 different Internal Revenue Code sections as they pertain to pension and retirement plans, and thus added Section 10.3(d) to Circular 230. This pragmatic approach turned out to be cost-effective for everyone involved. Namely, the IRS could speak directly with the Enrolled Actuary for the plan instead of taking the more circuitous route of speaking to an attorney who could call the Enrolled Actuary for the plan, relay the IRS’ question about an actuarial calculation, obtain the Enrolled Actuary’s response to the question, and then relay the response to the IRS.

Several years after the IRS added Section 10.3(d) to Circular 230, it then added section 10.3(e), permitting Enrolled Retirement Plan Agents, or ERPAs, to practice before the IRS.

In determining whether the IRS can permit non-attorneys to practice before the IRS, the Court focused on the language of 31 U.S.C. section 330(a)(2), which “allows the Secretary to ‘require that the representative demonstrate…(D) competency to advise and assist persons in presenting their cases.” The Court says that it is this language, which “does not disclose who these covered ‘representatives’ are. But it does tell us what the representatives do – what their “practice” is, in the words of both subsections: representatives ‘advise and assist persons in presenting their cases.”

The Court then goes on to say that:

“This statutory equating of ‘practice’ with advising and assisting the presentation of a case provides the first strike against the IRS’ interpretation. Filing a tax return would never, in normal usage, be described as ‘presenting a case.’ At the time of filing, the taxpayer has no dispute with the IRS; there is no ‘case’ to present.”

If, as the Court says, filing a tax return was not included in the statutory framework of Circular 230 practice before the IRS, and if practice before the IRS only includes representing taxpayers who are involved in a dispute with the IRS, such as an appeal, then filing a determination letter application or an EPCRS VCP Application with IRS Employee Plans would also not be included.

After the opinion was issued by the Court, a representative of the IRS said the Service will be working with the Dept. of Justice to appeal this decision.

Tax Consequences of 401(k) Plan Disqualification

I had a great question today – what happens when the IRS disqualifies a 401(k) plan?

What they really wanted to know is what happens to the non-elective contributions made by the employer into the plan, and how would a plan disqualification affect them (the person asking the question wears 2 hats when it comes to his 401(k) plan – he is both the plan sponsor and one of the participants in the plan.)

While most answers can be found by reading the plan document, this is not true when is comes to the tax consequences of plan disqualification. Most plan documents will say something about how the contributions made by the employer can be returned to the employer if the plan fails to initially qualify, but most plan documents do not address the specifics of the tax consequences of plan disqualification.

One of the reasons why this is true is that the tax consequences of plan disqualification can vary depending on who is asking the question, because the tax consequences of plan disqualification affect employees, employers, and the plan’s trust differently.

The IRS has put together a great website discussing this issue. It includes examples, such as this example about the tax consequences of plan disqualification on an employee:

Example: Pat is a participant in the XYZ Profit-Sharing Plan. The plan has immediate vesting of all employer contributions. In calendar year 1, the employer makes a $3,000 contribution to the trust under the plan for Pat’s benefit. In calendar year 2, the employer contributes $4,000 to the trust for Pat’s benefit. In calendar year 2, the IRS disqualifies the plan retroactively to the beginning of calendar year 1.

Consequence 1: General Rule – Employees Include Contributions in Gross Income
Generally, an employee would include in income any employer contributions made to the trust for his or her benefit in the calendar years the plan is disqualified to the extent the employee is vested in those contributions.

In our example, Pat would have to include $3,000 in her income in calendar year 1 and $4,000 in her income in calendar year 2 to reflect the employer contributions paid to the trust for her benefit in each of those calendar years. If Pat was only 20% vested in her employer contributions in calendar year 1, then she would only include $600 in her calendar year 1 income.

Exceptions: There are exceptions to the general rule (see IRC section 402(b)(4)):

  • If one of the reasons the plan is disqualified is for failure to meet either the additional participation or minimum coverage requirements (see IRC sections 401(a)(26) and 410(b)) and Pat is a highly compensated employee (see IRC section 414(q)), then Pat would include all of her vested account balance (any amount that wasn’t already taxed) in her income. A non-highly compensated employee would only include employer contributions made to his or her account in the years that the plan is not qualified to the extent the employee is vested in those contributions.
  • If the sole reason the plan is disqualified is that it fails either the additional participation or minimum coverage requirements, and Pat is a highly compensated employee, then Pat still would include any previously untaxed amount of her entire vested account balance in her income. Non-highly compensated employees, however, don’t include in income any employer contributions made to their accounts in the disqualified years in that case until the amounts are paid to them.
    Note: Any failure to satisfy the nondiscrimination requirements (see IRC section 401(a)(4)) is considered a failure to meet the minimum coverage requirements.”

Today in ERISA History

Sept. 27, 2007 – The IRS issues Quality Assurance Bulletin FY 2007-2 on the EGTRRA Staggered Remedial Amendment Period and Remedial Amendment Cycle for Individually Designed Plans. In 12 pages, it explains the remedial amendment cycles established by Rev. Proc. 2005-66 for individually designed plans as they were changed by Rev. Proc. 2007-44.

Rev. Proc. 2005-66 was issued by the IRS on Sept. 12, 2005. It created different remedial amendment cycles for pre-approved and individually designed plan document, essentially splitting the plan document world in two. According to Rev. Proc. 2005-66, pre-approved plans, which have reliance on a valid IRS opinion/advisory letter, follow a 6-year restatement cycle whose beginning and ending dates would be established by the IRS at a future date, and all other plans, which are considered individually designed because they lack a valid IRS opinion/advisory letter, follow a 5-year restatement cycle based on the last digit of the sponsoring employer’s Employer Identification Number (EIN).

On July 5, 2006, the IRS issued Quality Assurance Bulletin 2006-2 explaining how the remedial amendment cycles created by Rev. Proc. 2005-66 would work.

On July 9, 2007, the IRS issued Rev. Proc. 2007-44, which revised and superseded Rev. Proc. 2005-66.

On Sept. 27, 2007, the IRS then issued Quality Assurance Bulletin 2007-2, explaining how Rev. Proc. 2007-44 changed the remedial amendment cycles established by Rev. Proc. 2005-66, and superseding QAB 2006-2.

QAB 2007-2 contains a number of helpful charts for understanding the remedial amendment cycles for individually designed plans, including a chart which contains the exceptions to using the last digit of the sponsoring employer’s EIN to establish the Rev. Proc. 2007-44 remedial amendment cycle.

One of the explanations of Rev. Proc. 2007-44 contained in QAB 2007-2 is about terminating plans. QAB 2007-2 states:

For plan terminations the RAC will generally be shortened. Thus, any retroactive remedial plan amendments or other required amendments for a terminating plan must be adopted in connection with the plan termination. This will include plan amendments required to be adopted to reflect qualification requirements that apply as of the date of termination regardless of whether such requirements are included on the most recently published CL. An application will be deemed to be filed in connection with the plan termination if it is filed no later than the later of:

  • One year from the effective date of termination or
  • One year from the date on which the action terminating the plan is adopted

In no event can the application be filed later than 12 months from the date of distribution of substantially all plan assets.

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.

Today in ERISA History

Aug. 6, 2007 – The IRS issues proposed regulations on cafeteria plans. They are comprehensive regulations which incorporate previous guidance into this one set of proposed regulations and withdraw previous regulations issued in 1984, 1986, 1989, 1997 and 2000. These proposed regulations for cafeteria plans were part of an effort by the IRS to issue comprehensive regulations for a number of types of plans, including cafeteria plans and 403(b) plans. Like the Final 403(b) Regulations, these proposed regulations for cafeteria plans required a written plan document.

These regulations have not been finalized. History and Congress overtook the regulatory process when the Affordable Care Act became law, which requires a rewrite some of these regulations in addition to some new regulations.