Guest Article

(From the November 22, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Interim Amendment Rules May Be Revamped

The Advisory Committee on Tax Exempt and Government Entities - which provides officials of the IRS's Tax Exempt & Government Entities (TE/GE) operating division with the perspectives of the benefits community regarding how IRS policies and procedures affect them - is recommending that the interim amendment requirement be streamlined in order to improve the determination letter process.

The Employee Plans (EP) office of the TE/GE is making it a top priority for fiscal year 2011 to improve the staggered determination process, with the goal of improving processing efficiencies and increasing customer satisfaction. One of the key steps identified in the EP's 2010 Work Plan is to analyze the recommendations made by the Advisory Committee on Tax Exempt and Government Entities. The Committee issued a lengthy report in June 2010 that recommended various changes in the determination letter process, including modifications to the interim amendment rules.

Shortcomings Recognized with Interim Amendments

The Committee reported that the comments it received from the benefits community were highly critical of the interim amendment requirement in its current form. The gist of the criticism was that the rules were surprisingly complex and imposed an administrative burden and increased expense on plan sponsors.

The report likewise recognized the significant additional burdens the interim amendment rules imposed on the IRS. It noted the dramatic increase in the number of plans that have been corrected through the Voluntary Correction Program and under the Employee Plans Compliance Resolution System to resolve interim amendment and non-amender issues. It observed that, from the IRS's perspective, the cumbersome nature of the interim amendment rules has diverted, and will continue to divert, significant resources from other priorities. Moreover, it concluded that the IRS's burden would increase substantially if sponsors decided to file off-cycle applications for determination as a defensive strategy in response to the complexity and uncertainty under the current regime.

Recommendations Would Allow More Amendments Adopted at End of Cycle

The Committee identified six alternatives for dealing with the shortcomings of the interim amendment rules, while balancing the competing priorities of keeping plan documents current and minimizing cost and complexity. On closer scrutiny, it rejected four of the proposals as either not viable, or as not sufficiently reducing the current administrative burden on the IRS, employers and practitioners. Ultimately, it made two alternative recommendations:

The Committee proposed a fairly well-developed definition of "Core" Amendments. Core Amendments would be mandatory or discretionary amendments that: (1) materially or significantly affect any benefit, right or feature of importance to the general population of plan participants, (2) permit or require an action to be taken by participants with respect to benefits under the plan, (3) prospectively decrease or eliminate any § 411(d)(6) protected benefits, or (4) are deemed to be "Core" amendments by the IRS. The Committee noted that the second alternative - the Protected Benefits approach - would have the advantage of simplicity and ease of administration, and might be more efficient and simpler for sponsors of prototype and volume submitter plans to use.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.