Memorandum to Field Offices Outlining Procedures for Processing Employee Plans Not Amended Timely Under the 1986 Tax Reform Act

Date: October 17, 1995

To: Regional Chief Compliance Officers
District Director Key District Offices (EP/EO)
Information Copy: EP/EO Division Chiefs

From: Assistant Commissioner (Employee Plans and Exempt Organizations) CP:E

Subject: Procedures for Processing TRA '86 Non-Amenders

The remedial amendment period under section 401(b) for provisions of the Tax Reform Act of 1986 (TRA '86) has expired for virtually all plans. (For the purpose of this field directive, TRA '86 includes the Tax Reform Act of 1986 and subsequent legislation that changed the qualification requirements of the Code, up to and including the Omnibus Budget Reconciliation Act of 1983 (OBRA '93).) We anticipate that there will be a number of plans that have not been amended timely for TRA '86. These plans will come to our attention in one of three ways: (i) through the examination program, (ii) through the walk-in Closing Agreement Program (CAP) or (iii) through the determination letter process.

This memorandum sets forth the procedures designed to handle TRA '86 non-amenders. These procedures do not apply to TEFRA, DEFRA. or REA non-amenders. The procedures are designed for administrative simplicity and utilize current CAP procedures. They reflect input from the regions and districts, including the CAP Coordinators. The goal of the procedures is to encourage sponsors of plans that have not been amended timely to (1) promptly disclose this information to the IRS, (2) make the required plan amendments, (3) effect full correction and (4) requalify their retirement plans. The sanctions imposed in connection with these procedures will vary depending upon the time and manner in which the IRS discovers the failure to amend timely and the nature and severity of the defects in the plan.

Key district offices should follow these procedures when dealing with plans that have not been amended timely for TRA '86 (including terminating plans):

1. Plans discovered on examination. Existing CAP procedures should be used for plans that are discovered on examination. (See Chapter 11 of IRM 7(10)(54)). Therefore, these cases will not be subject to the 40% ceiling currently applicable to the walk-in CAP under Rev. Proc. 94-16, 1994-1 C.B. 576. The minimum sanction will be $1,000.

2. Plans submitted under the walk-in CAP. The sanction for plans submitted within fifteen months after the end of the remedial amendment period will range between a minimum of $1,000 and a maximum of 20% of the maximum payment amount, as defined in section 4.03 of Rev. Proc. 94-16 (MPA). If the plan is submitted to the walk-in CAP later than fifteen months after the end of the remedial amendment period, the special 20% limit will not apply and the sanction will range from a minimum of $1,000 up to a maximum of 40% of the MPA as provided under the regular walk-in CAP procedures. These sanctions are consistent with the provisions of Rev. Proc. 94-16. Key district offices should use activity code 362 (walk-in CAP) when processing these cases.

3. Plans discovered during the determination letter process. These cases must be assigned to a group for review. Specialists should inform the plan sponsor that the plan has not been timely amended and that a favorable determination letter will not be issued unless:

a. appropriate amendments are secured, along with a statement from the plan sponsor that the benefits of both current and former participants will be restored to the levels they would have been had the plan been timely amended: and,

b. the appropriate dollar sanction is paid.

After the amendments and the statement are secured from the plan sponsor, the case should be coordinated with the key district CAP Coordinator. Processing of the determination letter request will be suspended pending resolution of the case under the CAP.

If the determination letter request is made within the first fifteen months after the end of the plan's remedial amendment period, the sanction will not exceed 40% of the MPA. If the determination letter request is submitted after the first fifteen months, the 40% ceiling of the MPA is not applicable. In both instances the minimum sanction will be $1,000. After resolution of the case under the CAP, the determination letter application may be processed and a favorable determination letter may be issued.

NOTE: This treatment of non-amenders discovered during the determination letter process is an exception to the provisions of Rev. Proc. 94-16, which clearly state that submissions for determination letters will not be treated as voluntary submissions for purposes of the walk-in CAP.

Determination of Sanction Amount

The procedures above present a range of permissible sanctions. As under the regular CAP and walk-in CAP procedures, the exact amount of the negotiated sanction will depend upon a number of factors and should be based on the facts and circumstances of the specific case. These factors include the nature of the defects in the plan (e.g., the severity of the defects and the number of participants affected), the timeliness of the required amendments, good faith on the part of the plan sponsor, and for determination letter cases, the extent of the disclosure by the plan sponsor that the plan has not been amended timely. For example, if the cover letter of the determination letter request clearly acknowledges that the plan was not amended timely, it is appropriate to negotiate a sanction in the same range as that under CAP procedures described in paragraph 2 above. In addition, if the plan has been amended timely for all qualification requirements other than amendments required by the provisions of Unemployment Compensation Amendments of 1992 and OBRA '93 (the direct transfer provisions of section 401(a)(31) and the $150,000 compensation limitation of section 401(a)(17)), it is appropriate to negotiate a sanction at the lower end of the ranges of sanctions described in paragraphs 1, 2 and 3 above.

These procedures are to be followed in lieu of any other instructions. Any questions concerning this memorandum should be addressed to Rick Kotzenmacher at (202) 622-8166.

/S/ James J. McGovern