IRS Improves EP Determination Letter Process By Paul T. Shultz and James P. Flannery	Reprinted with permission from the October 20, 2000 Tax Notes. This article also appears in the Tax Notes Today section of TaxBase (click for info on 30-day trial subscription), Tax Analysts' tax news and research service on the Web.

Table of Contents

I. Pre-Approved Plans Approval Process

II. Determination Application Forms

III. Pre-Approved Plans Adoption Deadlines

IV. Individually Designed Plans

V. Streamlining the Determination Letter Process

VI. Enhancing the Screening Process

VII. The Future of the Determinations Process

---

The "New IRS" is alive and well and an active, going concern. This has been amply demonstrated in recent months by the actions of the Employee Plans section (EP) of the Tax Exempt and Government Entities Division of the Service. EP has fashioned a number of new tools to address an expected 250,000 to 300,000 determination applications during the next two years. Applications will cover changes required by six separate pieces of legislation beginning in 1994. /1/ Qualified plans have had to modify their operations to reflect the changes in law as the changes have gone into effect, going as far back as 1994. However, actual plan amendments have not been required until now. First, the acts allowed plans to delay the adoption of plan amendments. The IRS then used its authority to extend the amendment deadline further while it produced the needed guidance on the legislation.

There have been three major "waves" of EP applications preceding this latest round of plan amendments: ERISA; TEFRA, DEFRA and REA; and TRA '86. /2/ Faced with GUST and the fourth wave of applications in the past 25 years, the IRS resolved to do it faster, cheaper, and better this time.

I. Pre-Approved Plans Approval Process

First, the Service required that all "pre-approved" plans -- master and prototype (M&P) plans typically sponsored by large financial organizations and volume submitter (VS) plans typically sponsored by employee benefits practitioners -- be restated for GUST and submitted to the Service by the end of last year, that is, 2000 so that the IRS could direct its resources at those plans first. /3/ Service personnel in Washington who usually focus on private letter rulings and technical advice have been dedicated to review the M&P applications. Meanwhile, agents in Cincinnati, the IRS's centralized determination letter processing center, and others throughout the country, have been processing the VS applications. The target of the organization is to substantially complete all M&P and VS applications by February 1, 2002. This will expedite early applications for determination letters by employers who adopt volume submitter or nonstandardized M&P plans and either need or desire determination letters. Relaxing and simplifying its prior policies, the Service now requires adopters of pre-approved plans to adopt their GUST restatement by the later of December 31, 2002, or 12 months after the sponsor of the M&P or VS receives approval for the last plan submitted. /4/ Most adopters of M&P plans and many adopters of volume submitter plans will be able to rely on their plan's opinion or advisory letter. They will not have to get their own determination letter. (More about this below.) But in cases where they do, the adopters will also have to apply for determination letters by their GUST amendment deadline. /5/

II. Determination Application Forms

Second, the IRS also reviewed the forms used to apply for a determination letter. In doing so, it partnered liberally with the private sector, incorporating much of the input into the final decisions on the new forms. The Service eliminated Form 5303, used for collectively bargained plans, and directed users to Form 5300, which is generally available for determination letter (DL) applications. Further, the IRS revised each of the forms to eliminate unneeded questions and altered some forms to make them more user- friendly. For example, Form 8717, used to pay user fees in connection with submissions, has proved confusing to applicants who frequently pay the wrong fee and cause the IRS to spend resources clearing up the matter. The Service will be changing the layout on that form to minimize the opportunities for error. /6/

III. Pre-Approved Plans Adoption Deadlines

Third, in response to questions from the private sector, the Service clarified the somewhat complex rules applicable to pre- approved plans and adopters of those plans. /7/ Practitioners have responded with appreciation for the "clear restatement" of the rules.

IV. Individually Designed Plans

Fourth, as the IRS contemplated the large number of individually designed plans scheduled to arrive in late 2001 and early 2002 (until recently, these plans were required to file by the end of the 2001 plan year to take advantage of the "remedial amendment period"), Congress in early June passed long- anticipated (but unclear in timing) major pension legislation as part of the tax reduction law, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pub. L. 107-16. /8/ How could the Service's determination letter program accommodate the changes made by this new law?

Some parties urged the Service to extend the GUST remedial amendment period further (a year or two or three) and let plan sponsors incorporate the changes mandated or permitted by EGTRRA, even though EGTRRA had no delayed amendment provision. This would cause even further delay in the amendment of plans to reflect changes required to become effective as long ago as 1994!

The Service, drawing on the views of practitioners, said "no, we have a better idea." Within three weeks of enactment of EGTRRA, the Service said to sponsors "You must bring your plans into line with the changes required by past legislation. We will not extend the GUST remedial amendment period. The longer the plan goes without being changed to reflect practices that are required to be followed, the greater the likelihood of failure to follow the practices." /9/

The Service's initial plan guidance on EGTRRA also reflected its concern with ongoing "disconnects" between plans' terms and operations. The Service provided that sponsors that must (or wish to) comply with the EGTRRA changes must adopt the changes no later than the end of the plan year for which they are effective. And, since generally formal guidance will not have been issued, the plan amendments must reflect a good faith, reasonable interpretation of EGTRRA. Deferring EGTRRA amendments even to the end of the year, however, raised concerns about prohibited benefit reductions in the case of some of these amendments. The Service was able to allay concerns to a great extent by pointing out that plan amendments for the changes in the top-heavy rules -- the changes that were the source of the greatest concern -- generally did not need to be adopted before the end of the year. Still, the IRS encouraged employers to include the EGTRRA changes in their plans as soon as possible -- even with the plans to be submitted for GUST letters -- though the Service will not rule on the EGTRRA changes for now. These good faith EGTRRA plan amendments will have a new remedial amendment period, which will end no earlier than the end of the 2005 plan year, by which time it is expected that all needed guidance will have been published. /10/

So, a new approach has been taken -- the plan must reflect the law change, even though the Service has not provided full guidance on how the change must be implemented. The Service has stated its belief that this approach is preferable to the pattern followed in years past, where plan language and plan operation have been disconnected. Many practitioners have expressed similar views. To facilitate this process for companies, the IRS told the public that in view of the requirement that employers and sponsors of pre- approved plans must include EGTRRA changes in their plans, the Service would publish "sample amendments" that employers and sponsors could use in drafting their EGTRRA amendments. Moreover, the Service said, this guidance would be published by the end of August. And, keeping its word, late in August the Service posted the sample amendments, along with other EGTRRA guidance, on the Employee Plans Web site (www.irs.gov/ep). /11/

V. Streamlining the Determination Letter Process

Fifth, the Service considered what it might do to streamline the determination letter process. A small study group of personnel from both Washington and Cincinnati convened and through repeated meetings and conference calls, and through some partnering with outside practitioners, came up with a series of changes to the program.

• Because the DL program addresses primarily the form of a plan, and not whether its operation complies with the code, review of compliance with the nondiscrimination rules is not mandated, and thus the questions and forms and demonstrations used to determine compliance are not required. As a result, the Service decided to move two questions relating to coverage and safe harbors from Schedule Q to the determination letter application form and make these questions, as well as the Schedule Q itself, optional. /12/ This is expected to result in a significant reduction in use of both customers' and the Service's resources in the DL program. Plan sponsors will still have the option to submit data showing that the plan is nondiscriminatory. In this case, the letter may be relied on regarding the nondiscrimination requirements, unless and until there is a change in facts or other information on which the letter was based, provided the information submitted to the Service is retained. /13/ The effect of the form changes is that plan sponsors now may choose not to submit extensive data. In this case, the letter will not provide reliance on the nondiscrimination requirements.

• Because pre-approved plans have been reviewed by the IRS, the Service concluded that where an employer adopts such a plan on a word-for-word basis, the employer should not be required to apply for a determination letter to have reliance that the form of the plan is qualified. As a result, the Service provided that applications by such employers would not be required, and that employers would have reliance as to form on the opinion or advisory letter received by the sponsor of the pre-approved plan. /14/ This is another change that is expected to result in substantial reduction in the use of both customer and IRS resources during the current wave of applications.

• The Service also has asked practitioners to group similar plans and submit them together, so as to facilitate the Service's looking at "like" plans as a group and at the same time providing efficiencies for both the Service and the practitioners, and potentially speedier service and less cost for employers.

• In a further effort to provide more efficient service, the IRS has also asked practitioners, where it makes sense, to highlight changes in their plans, so that the agents reviewing the plans may see where the practitioner has made amendments. /15/

• In another change, practitioners submitting multiple employer plans may send only one of the plans and reliance as to form will extend to all adopters. This is also likely to lead to increased efficiencies. /16/

VI. Enhancing the Screening Process

Sixth, still looking for ways to reduce the use of resources and speed the determination letter process, the Service undertook a review of its "screening" procedures. Based on its experience in generally being able to approve certain types of plans without requiring significant document changes, the Service determined that there are many more plans that fit a "low- risk" profile, dictating that they need not be fully reviewed by agents in IRS offices. In some cases, a minimal contact with the practitioner will be needed to move an application to a low-risk category, but the time spent on that contact during the screening process is well worth the reward.

Further, the Service has undertaken to broaden the screening process. Currently, 30 agents in Cincinnati perform the screening function. The IRS soon will add 15 agents in each of six areas around the country to do screening. Thus, the Service will have 120 agents screening during the high-volume period of determination letter applications. (Note that determination letter applications will be screened and, where necessary, reviewed in various locations around the country without regard to the geographical location of the employer or practitioner who made the submission.)

These are the steps that the Service has planned to provide the best business results, best customer service, and best employee satisfaction it can through the period of high volume.

The events of September 11, 2001, have, of course, had their impact. The IRS has responded by postponing the end of the GUST remedial amendment period to February 28, 2002, for all plans and to June 30, 2002, for plans directly affected by the terrorist attack. /17/

VII. The Future of the Determinations Process

What about the future? What is the Service doing about changing the system so that these "crunches" either don't occur or are more easily handled?

Near-term, the Service is designing and testing a new electronic administration program for both Employee Plans and its sister unit, Exempt Organizations. This program will ultimately permit filing of applications by electronic means, including payment of the user fee, transfer of cases electronically from Cincinnati to other areas and back, and other appropriate steps. The IRS expects to pilot this program for Form 5307 applications (pre-approved plans) in 2002. Forms 5300 and 5310 applications will be tested later in the year. No, this new system will not help with the current mass of applications, but for the future the system should make things a lot easier, as well as reduce use of resources and speed up processing.

What about the long term? Is the IRS to be forever burdened by the current fairly cumbersome determination letter program, even with its sped-up processing with electronic tools? Is the Service forever to have the millstone of extended remedial amendment periods?

While doing all the tasks outlined above, the Service has also engaged in extensive "brainstorming" on what to do long- term about the program. Service personnel have spoken to numerous interest groups and sought as much partnering on these issues as possible. The outcome is a white paper discussing the range of options and key issues developed in the brainstorming sessions. This article will not repeat the substance of the white paper, but commends the paper for reading by all persons who have a stake in the employee plans system. The white paper can be found at www.irs.gov/ep.

The IRS has extended a warm welcome to all of its customers and other stakeholders to engage in a partnering dialogue on the future of the determination letter program, and looks forward to holding this dialogue over the next many months, to seek a consensus among all affected parties.

FOOTNOTES

/1/ The six are:

• the Uruguay Round Agreements Act (GATT), Pub. L. 103-465;
• the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), Pub. L. 103-353;
• the Small Business Job Protection Act of 1996 (SBJPA), Pub. L. 104-188;
• the Taxpayer Relief Act of 1997 (TRA '97), Pub. L. 105-34;
• the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA '98), Pub. L. 105-206; and
• the Community Renewal Tax Relief Act of 2000 (CRA), Pub. L. 106-554.

The acronym "GUST" is used to refer to these acts collectively.

/2/ The Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. 93-406; the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248; the Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98-369; the Retirement Equity Act of 1984 (REA), Pub. L. 98-397; and the Tax Reform Act of 1986 (TRA '86), Pub. L. 99-514.

/3/ Rev. Proc. 2000-20, 2000-6 IRB 553,, section 19.01.

/4/ Notice 2001-42, 2001-30 IRB 70, section VI.

/5/ Rev. Proc. 2000-20, section 19.04, and Announcement 2001-77, 2001-30 IRB 77, section II.E.

/6/ Announcement 2001-77, section I.C. It should also be noted that under section 620 of EGTRRA, effective January 1, 2002, user fees will be waived for eligible small employers submitting requests for determination letters for certain newly formed plans.

/7/ Announcement 2001-12, 2001-6 IRB 526.

/8/ Rev. Proc. 2000-27, 2000-26 IRB 1272, which extended the GUST remedial amendment period to the end of the first plan year beginning on or after January 1, 2001, has recently been modified. Rev. Proc. 2001-55 provides a general extension of the GUST remedial amendment period to February 28, 2002.

/9/ Notice 2001-42, section I.

/10/ Id., sections III and V.

/11/ Notice 2001-57, 2001-38 IRB 279, contains the sample EGTRRA amendments. Notice 2001-56, 2001-38 IRB 277, provides guidance on the effective dates of certain EGTRRA provisions.

/12/ Announcement 2001-77, section I.E.

/13/ Rev. Proc. 2001-6, 2001-1 IRB 194, section 21.

/14/ Id., section II.

/15/ Id., section IV.

/16/ Id., section III.

/17/ Rev. Proc. 2001-55, sections 3 and 4.

END OF FOOTNOTES

---

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.