Are proposed Treasury Regs. 1.125-2 Q7(b)(7) binding?

[Guest zzedzz]

I've seen several references to proposed Treasury Regs. 1.125-2 Q7(b)(7) in several recent posts. It's not clear to me whether these regs are binding or not. If they are not currently, are they expected to be in the future? How should they be viewed in general? If they are not binding, are there consequences to not following them?

[GBurns]

Any Proposed Regs are binding if that is what you decide to follow. Any plan must follow the rules that it takes or institutes for itself. Any Plan not following its own rules stands to be disallowed as a consequence.

[mbozek]

GB: you have any citation for the statement that any plan not following its own rules will be disallowed (whatever that means)? IRS audit guidelines acknowledge that a 403b plan is only required to be administered in accordance with the law, even if it is inconsistent with terms of the plan document. Administering a plan in accordance with its terms to maintain tax deferred status is only required if IRS regs dictate such performance, e.g., qualified plans.

[GBurns]

Disallowed as in not being allowed the tax benefits.

I cannot believe that you are asking for a cite regarding a plan which is required by law (125(d), 1.125-1 Q&A 2 and 3, 1.125-2 Q&A 2&3) to have a written document which contains its rules of operation.

What do you think the purpose of a document with rules of operation are for? Why would you question what would happen if a plan does not follow the law or its rules of operation? Operating a business outside of its by-laws can cause disallowance of tax benefits, Why would a plan be any different?

[mbozek]

Having a written plan is not the same as complying with the applicable tax law. A 125 plan that complies with the tax law will not lose its tax benefits if the plan is administered in a way that is inconsistent with the plan docs because it will meet the requirement is that the plan operate in accordance with the applicable tax laws. 403b annuities are an example of this form of compliance because the IRS audit guidelines specifically note that a 403b plan only can only lose its tax deferred status for failure to comply with the tax law and and cannot not lose its tax deferred staus if it is operated in a manner inconsistent with its terms because ther is no IRS requirement that the plan be operated in accordance with its terms.

[GBurns]

You made a good point.

In looking back it is the failure to implement, administer and maintain the plan in accordance with the law that matters to the IRS. The fact that the plans were not even operating in accordance with their own plan document was irrelevant since they failed to be legal in the first place. The problems were lack of adoption, retroactive adoption, ineligible participants, no salary reduction agreement etc etc.

[Guest zzedzz]

I'm still a little unclear as to the answer to my original question. GBurns says the proposed regs "are binding if that is what you decide to follow." I agree, if those regs are put into the plan docs. What I infer then is that the regs are not binding, unless we choose to incorporate them into the plan.

Does anyone know if the IRS intends to make them official (and presumably binding) regs in the future? When were they originally issued as proposed regs?

[GBurns]

Look at page 18 under "Format":

http://www.irs.gov/pub/irs-utl/tres_reg-1125-1.pdf

Look at page 18 under "Reliance on These Proposed Regulations":

http://www.irs.gov/pub/irs-utl/tres_reg-1125-2.pdf

Then look at hard copy version such as that done by CCH and read the "Caution" at the top of each page. You also might want to look at the similar disclaimer on many newer Proposed Treas Regs under the section "Proposed Effective Date".

You might also want to look at comments made by judges in many recent cases from Grande v Allison to Mead v US in the Supreme Court regarding the validity of Proposed Regs.

The Propsed Regs have been around since 1984 and 1989 and that length of time was even commented on in Grande.

It might be good if any decision as to whether or not to follow any Proposed Regs is based on good legal counsel taking the facts and circumstances into consideration.

[Guest zzedzz]

Thanks GBurns.