plan has no IRS determination and is soon to terminate

[Peter Gulia]

In 1968, an employer established a money-purchase plan. The plan always has had only one participant, who also is the employer’s sole shareholder and sole director and is the plan’s administrator and trustee. The plan and trust documents are individually-designed. The employer now wants to terminate the plan, and the participant would instruct that her final distribution be paid as a direct rollover into an IRA. The participant’s vested accrued benefit is more than $1 million.

A practitioner who preceded me seems to have furnished a regular course of plan amendments through 2003, and all of these are signed. If I accept, I’d be engaged to draw a plan amendment for recent years’ tax-law changes, if any (the plan already has a choice of 100%, 75%, and 50% survivor annuities), and the termination. There is NO IRS determination – ever.

For terminating a plan, ordinarily one uses Form 5310 to get an IRS determination that the plan remains tax-qualified in form. Given the facts described above, is a Form 5310 application sensible? Would the IRS reviewer seek to retrace the entire 40-year history of plan documents and amendments? (The Instructions state that, in the absence of a preceding IRS determination, the applicant must submit the initial plan and all amendments.) If so, how worried should one be that the IRS would uncover some decades-ago document defect that disqualifies the plan?

(If it matters, it would be difficult to find an operational defect because all that’s happened so far is that the employer contributed each year 25% of its employee’s compensation.)

Assuming that the amendment I draw would be correct, is it “safe” to file a Form 5310 (without any preceding determination)? Or should I tell my prospective client that it’s wise not to open this door (and, without any IRS review of the plan, simply to believe it to have been tax-qualified)?

I’d appreciate your views, especially about why it would be wise or unwise to use an IRS determination procedure.

[Bird]

I've gone from always recommending and generally insisting on a 5310 submission to "officially" recommending but not often insisting on a 5310 submission. The bottom line is, it's (now) expensive insurance and it doesn't buy all that much, IMO.

On the other hand, with a million bucks at stake, maybe it's not that expensive. But unless something is obvious, it's highly unlikely that the IRS would come back later and audit and find something wrong and actually try to DQ the plan. And it's a long wait; at this point you might not get a favorable letter before the end of the year; then you have to decide if you process the payout or let it spill over into another year and file another return.

I do remember that they won't go back 40 years; I think, at least the last time around, that if you had a TRA 86 document that was good enough.

I do also know that if you submit, it doesn't mean they won't come back and do a "routine" audit.

And despite comments a few years back that they were going to target plans terminating without a DL, I don't believe there is any increased risk of that (an audit).

Sorry if those thoughts are kind of random.

[david rigby]

Is a DL is the key to getting/documenting a valid rollover? If so, then going thru this "hassle" might be worthwhile? If not, then it may be overkill.

Since I'm not a lawyer, my default recommendation is to do the DL.

[Everett Moreland]

Peter:

You might consider submitting under VCP as a nonamender. I have submitted plans established in the 1960s, and that have not received an IRS determination letter, under VCP as nonamenders. The VCP application will state that the plan has not been timely for any IRC provision since the plan was established, even though the plan has been timely amended for some IRC provisions. I submit on the assumption that if an amendment does not have a determination letter then the amendment is defective. The IRS has dealt very reasonably with these and the process has worked very well.

[jpod]

Assuming you have (or will have) all of the historical documents, for a retirement account worth $1mm I would definitely do a 5310 and, simultaneously, a non-amender VCP. Shouldn't the VCP fee be only $750? Even if you cannot identify any problems with past amendments, the worst that can happen is that the IRS will bounce your VCP submission, but in that case I think it would be very difficult for the IRS to hit your client hard if it subsequently finds amendment deficiencies either in the 5310 process or during a subsequent audit.

By the way, the foregoing assumes that (1) if you looked long and deep you would not find any other employees who were shut out of the plan, (2) there are no 414(b), © or (m) problems lurking out there (currently or in the past), and (3) all 5500s (including EZs) that had to be filed were filed. If that is not the case, I'd have to re-evaluate the situation.

[Everett Moreland]

My experience with the IRS on nonamender VCP submissions is that (1) the IRS accepts submissions where some very old plan documents are missing and (2) the IRS does not asked why prior timely amendments are defective. I think that in VCP the IRS generally operates on the assumption that an amendment is defective if you say it is.

[Peter Gulia]

To Bird, david rigby, Everett Moreland, and jpod, thank you so much for your helpful pointers. Whether through these BenefitsLink boards or by telephone or e-mail, please let me return the professional courtesy when I can help you think through a situation.