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Guest Article

Deloitte logo

(From the November 25, 2002 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

IRS Extends GUST Period for Pre-Approved Plans, Other Deadlines


The IRS on November 19 issued Rev. Proc. 2002-73 to provide yet another extension of the GUST remedial amendment period for pre-approved plans. The revenue procedure also extends the time for amending plans to comply with section 314(e) of the Community Renewal Tax Relief Act (CRA), which permits plans to include qualified transportation fringe benefits in their compensation definitions. Finally, the revenue procedure extends the deadlines for amending plans to reflect use of the new GAR mortality table and for purposes of incorporating "deemed section 125 compensation" into a plan's compensation definition, but only for those plans that are still within their GUST remedial amendment periods.

Extension of GUST Remedial Amendment Period for Pre-Approved Plans

Late last year, the IRS extended the GUST remedial amendment period for most plans until February 28, 2002, or the last day of the plan's 2001 plan year, if later. (The GUST remedial amendment period had been set to end on December 31, 2001 for calendar year plans.) IRS further extended the GUST remedial amendment period for employers who timely adopted (or certified their intent to adopt) a pre-approved plan (i.e., a master or prototype or volume submitter plan) until the later of December 31, 2002, or the end of the 12th month beginning after the date on which IRS issues a GUST opinion or advisory letter for the pre-approved plan.

Sponsors of pre-approved plans have been complaining to IRS that, due to unforeseeable business circumstances, their clients will not be able to adopt their GUST-approved plans by the end of the extended GUST remedial amendment period. In response, Rev. Proc. 2002-73 further extends the GUST remedial amendment period for pre-approved plans until the later of September 30, 2003, or the end of the 12th month beginning after the date on which IRS issues a GUST opinion or advisory letter for the pre-approved plan.

Deadline for Plan Amendments Relating to Section 314(e) of the CRA

Section 314(e) of the CRA clarified that salary reduction amounts for qualified transportation fringe benefits (i.e., commuter highway vehicles, transit passes, and qualified parking) are to be treated as compensation for purposes of the tax-qualified retirement plan benefit and contribution limits.

According to IRS Notice 2001-37, 2001-25 I.R.B. 1340, qualified plans must be amended to comply with section 314(e) of the CRA by the end of the plan's GUST remedial amendment period. Additionally, the amendment must be effective no later than the first day of the first plan and limitation years beginning on or after January 1, 2001.

In Rev. Proc. 2002-73, the IRS extends the deadline for amending plans for this purpose until the later of--

  • the end of the first plan year beginning on or after January 1, 2002,
  • the end of the plan's GUST remedial amendment period, or
  • June 30, 2003.

The purpose of the extension is to provide relief to plans that have otherwise been timely amended for GUST, but have not yet been amended to comply with the CRA.

Deadline for Plan Amendments Relating to GAR Mortality Table

Defined benefit plans must begin using the GAR mortality table for determining the lump sum present value of participants' benefits (and for other purposes) for distributions with annuity starting dates on or after December 31, 2002, unless the plan specifies an earlier effective date. Plans also must be amended to reflect this change by the last day of the plan year in which it becomes effective-- i.e., December 31, 2002, for calendar year plans.

Rev. Proc. 2002-73 extends this deadline until the end of the plan's GUST remedial amendment period, if later than the otherwise applicable deadline. The extension will not help most plans because their GUST remedial amendment periods already have ended. However, the extension ensures other plans will not have to adopt this amendment before the end of their GUST remedial amendment periods.

Deadline for Plan Amendments Relating to "Deemed Sec. 125 Compensation"

Another looming deadline for some plans relates to incorporating "deemed section 125 compensation" into their compensation definitions. This deadline affects only those few employers that have an automatic enrollment health premium conversion plan that is mandatory for employees who cannot prove they have other health insurance coverage.

Earlier this year, IRS endorsed two variants of automatic enrollment premium conversion plans. In both cases, employees were automatically enrolled in a health insurance premium conversion plan unless they affirmatively elected cash. However, in one scenario the plan did not allow employees to elect cash (instead of employee-only coverage) unless they could certify that they had other health insurance coverage.

In the case of employees who could not satisfy this certification requirement (and thus could not elect cash), IRS ruled IRC section 125 would not apply. In other words, these employees could not pay their health insurance premiums with pretax dollars. However, this raised the further question of whether these premium payments would count as compensation for purposes of certain qualified plan limits, among other things. [Generally, IRC section 415(c) limits annual additions to defined contribution plans to $40,000 or 100 percent of the participant's compensation. According to IRC section 415(c)(3)(D), the term "participant's compensation" includes section 125 cafeteria plan contributions.]

The IRS held in Rev. Rul. 2002-27, 2002-20 I.R.B. 925, that employers could treat these premium payments as "deemed section 125 compensation" for purposes of the section 415(c)(3) compensation definition. However, they must amend their plans to incorporate "deemed section 125 compensation" into their definitions of compensation by the end of the first plan year in which the plan is so operated.

Rev. Proc. 2002-73 extends this amendment deadline until the end of the plan's GUST remedial amendment period, if later than the otherwise applicable deadline. The purpose of the extension is to ensure that plans do not have to adopt this amendment before the end of their GUST remedial amendment periods.


Deloitte logoThe information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances.

If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094).

Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207.

Copyright 2002, Deloitte.


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