Guest Article

(From the October 31, 2011 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Clarifies User Fee Exemption for Certain Plans

Acknowledging the difficulty in applying the 5-year eligibility test under Code § 7528(b), which exempts certain small employers from the determination letter user fees, the IRS published a simplifying rule in Notice 2011-86 by which plans can determine their eligibility.

Code § 7528(b) provides that an application for determination for a pension, profit-sharing, stock bonus, annuity, or ESOP plan—or on the exempt status of any trust that is part of such a plan—is exempt from the user fee requirement if the plan is maintained solely by one or more "eligible employers" and the application is filed by the last day of the fifth plan year the plan is in existence (or, if later, by the last day of any remedial amendment period with respect to the plan beginning within the first five plan years).

An "eligible employer" is an employer who had 100 or fewer employees who received $5,000 or more in compensation from the employer for the preceding year—and who has at least one non-highly compensated employee participating in the plan.

In light of the cyclical remedial amendment periods and staggered submission periods for determination letter applications under Revenue Procedure 2007-44, the Notice observed:

As a result, the Notice provides a simplifying rule by which the IRS will treat an application as having been filed within the last day of the remedial amendment period beginning within the first five years if:

For example, the IRS will treat a determination letter application 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 January 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 January 1, 2001 (i.e., January 1 of the tenth calendar year immediately preceding 2011, which is the year in which the submission period for the plan's current remedial amendment cycle begins).

In the event a plan qualifies for the exemption but does not satisfy this simplifying rule, the Notice directs the applicant not to include payment of the user fee, but rather to include an explanation of how the application meets the requirements for exemption. The simplifying rule applies to applications filed after January 31, 2011. However, it does not apply to applications filed by April 30, 2012 for EGTRRA determination letters for defined benefit plans that are eligible for the six-year EGTRRA remedial amendment cycle ending on April 30, 2012, which are eligible for the user fee exemption as provided in Notice 2003-49.

IRS User Fees are updated annually. Under Revenue Procedure 2011-8, the user fees for an application for determination range from $300 to $25,000 in 2011. The higher fees apply to multiple-employer plans.

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, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2011, Deloitte.