Guest Article

(From the May 21, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

VCP Submission Kit Now Available for Pre-Approved DB Plan Non-Amenders

Pre-approved defined benefit plans that missed the April 30, 2012 deadline for adopting IRS-approved plan documents that reflect the changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) now have a streamlined submission kit for correcting the failure under the IRS's Voluntary Compliance Program (VCP).

Extended EGTRRA Remedial Amendment Period

EGTRRA's changes include increasing the compensation limit under Code section 401(a)(17) to $200,000; allowing a rollover of certain after-tax contributions under Code section 401(a)(31); providing for the automatic rollover of certain mandatory "cash out" distributions under Code section 401(a)(31); amending the definition of "eligible retirement plan" under Code section 402(c) to include a Code section 403(b) annuity contract and eligible governmental Code section 457(b) plan; excluding hardship distributions from the definition of "eligible rollover distributions" under Code section 402(c); and reducing the mandatory 401(k) contribution suspension period after a hardship withdrawal from one year to six months.

Although EGTRRA's changes took effect some time ago, adopting employers of pre-approved plans (i.e., Master & Prototype or Volume Submitter plans) were given an extended period to adopt EGTRRA plan documents. The extended period gave the sponsors of the pre-approved plans sufficient time to amend their documents for EGTRRA and obtain IRS approval for those amendments. Adopting employers were then granted a two-year period in which to adopt the final EGTRRA pre-approved plan documents as ultimately approved by the IRS. For pre-approved defined contribution (DC) plans the deadline was April 30, 2010—and for pre-approved defined benefit (DB) plans the deadline was April 30, 2012—for employers to adopt the final IRS-approved EGTRRA plan documents.

Streamlined VCR Submission Kit

As it did for employers that missed the April 30, 2010 deadline for pre-approved DC plans, the IRS recently released a streamlined VCP Submission Kit for employers who missed the April 30, 2012 deadline for adopting EGTRRA-approved DB plans. Under the program, the employer first needs to adopt an EGTRRA pre-approved DB plan as sanctioned by the IRS. See the IRS's EGTRRA M&P and VS plan webpage at: http://www.irs.gov/retirement/article/0,,id=164677,00.html and the related list of EGTRRA pre-approved plans for which the IRS has issued a favorable opinion or advisory letter.

If the application is filed within one year (i.e., by April 30, 2013) a 50 percent fee reduction will apply. For example, a fee of $1,250 would apply instead of $2,500 for a plan with 51 to 100 participants. Seven other relatively straightforward items also need to be included in the application:

The kit includes complete examples of the required appendices, along with line-by-line instructions. The IRS indicates that, from the date the application is submitted, the process can take four to six months for a compliance statement to be issued.

The failure of a plan to be timely amended to comply with law raises qualification issues. The potential ramifications of disqualification include the inclusion of the present value of the accrued benefit (to the extent vested) in the employee's taxable income, inability to deduct employer contributions, loss of the trust's tax exempt status, and disallowance of rollovers (and other favorable tax treatment of distributions). Obtaining a compliance statement to cover the late adoption of EGTRRA plan documents means that the IRS will treat the plan as qualified, the kit explains.

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 2012, Deloitte.