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Guest Article

(From the June 18, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Issues Updated Guidance on Staggered Remedial Amendment Periods

The IRS has issued Revenue Procedure 2007-44 to update the rules for the five-year staggered remedial amendment cycle for individually designed tax-qualified retirement plans, and the six-year cycle for pre-approved plans. The new revenue procedure supersedes Rev. Proc. 2005-66, 2005-37 I.R.B. 509, which established the five- and six-year remedial amendment period cycles. The updated revenue procedure is effective as of June 13, 2007.

Evolution of Staggered Remedial Amendment Periods

In 2001 the IRS published the first of two white papers on possible changes to the Employee Plans Determination Letter Program. The IRS initiated a comprehensive review of the determination letter program because of the workload fluctuations that result from legislative changes, and because it determined it needed "to strike a more effective balance in the application of its limited resources among the EP determinations, examinations, voluntary compliance and customer outreach programs."

The first white paper discussed a number of options for the program's future, ranging from maintaining the status quo to replacing the program with a third-party certification system to eliminating EP determination letters altogether. After reviewing comments on the first white paper, the IRS in 2003 issued a second white paper that narrowed the original options to two: (1) maintaining the status quo; and (2) replacing the current system with a staggered remedial amendment period system. The second white paper also outlined a possible staggered remedial amendment period system and provided examples of how it would work.

In 2004, IRS announced plans to implement a staggered, five-year remedial amendment cycle for individually designed plans, and regular six-year amendment/approval cycles for all pre-approved plans. The IRS followed that up with Announcement 2004-71, which included a draft revenue procedure and a solicitation of comments. Finally, the IRS issued Rev. Proc. 2005-66 to implement the staggered remedial amendment periods.

Basically, Rev. Proc. 2005-66 established five-year remedial amendment cycles for individually designed plans based on the last digit of the plan sponsor's employer identification number (EIN). For example, plan sponsors with EIN's ending in 1 or 6 are Cycle A plan sponsors. The last day of the initial cycle for Cycle A plan sponsors was January 31, 2007, and the next five-year remedial amendment cycle for these plan sponsors will end on January 31, 2012. For pre-approved plans, Rev. Proc. 2005-66 established different six-year remedial amendment cycles to defined benefit and defined contribution plans.

Each year the IRS publishes a Cumulative List of Changes in Plan Qualification Requirements (Cumulative Lists), which identify "all changes in the qualification requirements resulting from changes in the statutes, or from regulations or other guidance published in the Internal Revenue Bulletin that are required to be taken into account in the written plan document." The IRS uses the Cumulative List to review plans with submission periods beginning on the February 1st after the Cumulative List is issued. For example, the IRS reviewed Cycle A individually designed plans based on the Cumulative List (Notice 2005-101) the IRS issued late in 2005. Likewise, the IRS will use the Cumulative List (Notice 2007-3) it published late in 2006 to review Cycle B individually designed plans. The IRS started accepting determination letter applications from Cycle B plan sponsors on February 1, 2007.

What Does Rev. Proc. 2007-44 Do?

As noted, Rev. Proc. 2007-44 clarifies, modifies, and supersedes Rev. Proc. 2005-66. The specific changes made by Rev. Proc. 2005-66 are detailed in Section 3 of the revenue procedure, which is reprinted below.

SECTION 3. CHANGES TO REVENUE PROCEDURE 2005-66

In addition to minor revisions and clarifying language, the following changes have been made to Rev. Proc. 2005-66:

.01 The revenue procedure contains more detail on the plan qualification requirements the Service will consider in its review of opinion, advisory or determination letter applications. It clarifies that:

Except as otherwise provided on the applicable Cumulative List, the Service will not consider any guidance or statutes issued or enacted after the October 1st preceding the date the applicable Cumulative List is issued, qualification requirements that become effective in a calendar year following the calendar year in which the submission period begins with respect to the applicable Cumulative List, or statutes that are first effective in the year in which the submission period begins with respect to the applicable Cumulative List, for which there is no guidance specified on the Cumulative List. (sections 4.03 and 4.04); and
Special rules apply with respect to the Service's review of plans for amendments to reflect the Pension Protection Act of 2006 (PPA '06) and the procedures to submit those amendments. Although individually designed plans and multiple employer plans submitting determination letter applications may be amended for PPA '06, the Service will not consider these PPA '06 provisions in its review of plans using the 2006 and 2007 Cumulative Lists. In contrast, preapproved defined benefit plans must be amended for certain provisions of PPA '06, and the Service will consider these amendments in its review of opinion and advisory letter applications. (section 4.05)
The limitations on the Service's review of certain plans summarized in (1) and (2) above do not apply to terminating plans. (sections 4.03 and 4.05)

.02 More detail on adoption deadlines for interim and discretionary amendments is provided, including special deadlines for governmental and tax-exempt employers. In addition, the revenue procedure clarifies that other statutory provisions or guidance may set forth earlier or later deadlines, such as the delayed amendment deadline under section 1107 of PPA '06. (sections 5.05, 5.06 and 5.07)

.03 The exceptions to the general rule for determining a plan's five-year remedial amendment cycle (cycle) are expanded and clarified to provide:

A governmental plan's cycle (Cycle C), applies to a governmental plan that is also a multiemployer plan, as well as to a governmental plan that is also a multiple employer plan. (section 10.04)
Another exception is added for a jointly trusteed single employer collectively bargained plan, where the joint board of trustees is treated as the plan sponsor for purposes of Form 5500. The cycle for such a plan is determined based on the EIN used on the Form 5500. (section 10.05)
The exception specifying that a plan's cycle for multiple members of a controlled group or an affiliated service group under ? 414(b), (c) or (m) is determined with reference to the last digit of the EIN used to report the plan on the Form 5500 is clarified to provide that this exception does not apply to multiemployer, multiple employer, or governmental plans. (section 10.05)
The rules on alternative elections and the rules on entities that may make these elections have been revised. This revenue procedure clarifies that members of a controlled group or affiliated service group (controlled group) that may make the election to choose Cycle A include a parent-subsidiary controlled group as well as a controlled group that is not a parent-subsidiary controlled group. A parent-subsidiary group may choose an alternative election which is determined by reference to the last digit of the parent's EIN. The parent generally makes the election. Members of a controlled group, including a parent subsidiary controlled group, that may not make this election include governmental plans and jointly trusteed collectively bargained plans, as well as multiemployer and multiple employer plans. (section 10.06)
A new exception is added allowing an election to be made by certain groups of tax- exempt organizations that are not controlled groups or affiliated service groups under ? 414 of the Code. An election may be made by a centralized organization that the cycle is determined based on the EIN of the centralized organization, if such centralized organization handles the administration and operation of plans that have substantially the same terms and are maintained by separate tax-exempt organizations (or related taxable entities in the group maintaining plans whose terms are substantially the same). (section 10.07)
Details on what to include and when to file the alternative elections under section 10.06 are provided, including a new requirement that the election be filed with each determination letter application. This revenue procedure specifies that the election applies to members maintaining qualified plans, that a new member of a controlled group or affiliated service group must make an election in order for the existing members to retain the original joint election, and that an updated list of current members and plans must be maintained. In the case of a parent-subsidiary controlled group or a group described in section 10.07 with a centralized organization, a new election does not have to be made each time a member joins or leaves the group, but an updated list must be maintained by the parent. (section 10.08)
In the case of a parent that has no EIN, the highest level entity in the U.S. that has an EIN is permitted to be substituted for the parent for purposes of making the alternative elections. (section 10.09)

.04 The definitions of cycle-changing events, such as merger or acquisition, change in plan sponsorship etc., have been expanded to include a plan changing its status by becoming or ceasing to be a multiemployer plan or a multiple employer plan. Details are provided on when a change in status occurs pursuant to certain elections to be a multiemployer plan. In addition, the rules cover more scenarios to determine the applicable cycle after a cycle-changing event, describing the interaction and significance of the pre-change, post-change, open, and expired cycles. (sections 11.01 and 11.02)

.05 Additional rules relating to determination letter applications specify that individually designed plans must be restated when they are submitted for determination letters and Form 6406 may no longer be used to apply for determination letters. (sections 12.03 and 12.04)

.06 Details are provided on the types of off-cycle applications for determination letters that will be given the same priority as on-cycle applications. Applications for determination letters for terminating plans, certain new plans and applications due to urgent business need are listed. (section 14.02)

.07 Rules are rewritten to clarify that the initial remedial amendment cycle for a new plan is the applicable cycle that includes the date on which the plan's initial remedial amendment period under ? 1.401(b)-1 (determined without regard to the extension in section 5.03) ends. (sections 5.03 and 14.04)

.08 More examples are added or revised to reflect what the Service will review based on the Cumulative List and to illustrate the rules regarding submissions for a new plan or existing plan whose remedial amendment cycle ends after the applicable ? 401(b) remedial amendment period. (section 15)

.09 More details are provided on when an employer's plan is treated as a preapproved plan and is eligible for a six-year remedial amendment cycle, including clarifying definitions of prior adopter, new adopter, intended adopter, and existing and interim plans. (sections 17.01 -- 17.06)

.10 The submission deadline to submit applications for opinion and advisory letters for sponsors and practitioners maintaining defined benefit mass submitter plans and national sponsors is extended from October 31, 2007 to January 31, 2008. (section 18.02)

.11 Rules are clarified on when an employer is entitled to remain in the six-year remedial amendment cycle (six-year cycle) after adopting an individually designed plan and making certain types of amendments, with examples. These clarifying rules include the following:

With certain exceptions described in (2) and (3) below, an employer that modifies a plan so that it is no longer considered an M&P or VS plan will nevertheless stay in the six-year cycle for the current and subsequent six-year cycles. (section 19.02)
An employer that is an intended adopter or prior adopter of a preapproved plan that instead adopts an individually designed plan, or an employer that amends an M&P or VS plan to incorporate a type of plan not allowed in the pre-approved program and makes such amendment more than one year after the date the employer initially adopted the pre-approved plan, remains in the six-year cycle for the current cycle, and then switches to the five-year remedial amendment cycle (five-year cycle). (section 19.03)
If (a) the nature and extent of amendments made by the employer fall within section 24.03 of Rev. Proc. 2005-16, or (b) an employer amends an M&P or VS plan to incorporate a type of plan not allowed in the pre-approved plan program within one year after the date the employer initially adopted the preapproved plan, the applicable cycle is immediately the five-year cycle. (section 19.04)

.12 This revenue procedure removes the rule under which an M&P sponsor's authority to amend on behalf of an adopting employer is conditioned on the plan being covered by a favorable determination letter if the employer is required to obtain a determination letter in order to have reliance. It also clarifies that a sponsor should generally continue to amend on behalf of the adopting employer even if the adopting employer makes amendments to the plan. However, the sponsor no longer has the authority to amend on behalf of the employer if the Service has exercised its authority under section 24.03 of Rev. Proc. 2005-16 or the amendment is an impermissible type not allowed in the M&P pre-approved program. (section 19.05(3))

.13 New details on what constitutes an off-cycle filing for pre-approved plans are added that clarify the provisions of Rev. Proc. 2005-16 on off-cycle filings including:

When to submit applications for new pre-approved plans created after the submission period for the applicable six-year cycle, when adopting employers must adopt such plans, and the applicable Cumulative List that will be used in reviewing these plans. (section 20.01)
Sponsors or practitioners who submitted applications for opinion or advisory letters prior to the submission deadline for the applicable six-year cycle, with respect to pre- approved plans that were in existence prior to such submission deadline, may not also submit off-cycle applications for such plans. (section 20.02)

.14 A provision is added stating the conditions under which sponsors, practitioners or employers who made a determination with respect to a particular plan based on a reasonable and good faith interpretation of Rev. Proc. 2005-66 prior to the issuance of this revenue procedure will be deemed to have complied with this revenue procedure. (section 21)

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, Taina Edlund 202.879.4956, Elizabeth Drigotas 202.879.4985, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

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