Failure to Adopt Automatic Rollover Good Faith Amendment by Deadline

[Guest CMSP]

I have a client who failed to timely adopt a good faith amendment reflecting the automatic rollover requirements by the end of their first plan year ending on or after March 28, 2005. According to IRS Notice 2005-5, Q&A-16, the timely adoption of a good faith amendment allows an employer to retroactively correct any disqualifying plan provisions within the plan's EGTRRA remedial amendment period. However, what is the plan's remedial amendment period if it failed to adopt this good faith amendment? Is it the general remedial amendment period contained in IRC section 401(b)? If not, what is it? It does not seem that it should be the end of the initial EGTRRA remedial amendment period (before extensions) since IRC 401(a)(31)(B) did not spring into affect until regulations were adopted by the DOL.

I'm wondering the answer to these questions for two reasons: (1) If the remedial amendment period is the general rule in IRC section 401(b), do I still have time to timely adopt an amendment to reflect the automatic rollover requirements since my client has not filed their tax return yet; or alternatively, (2) am I eligible for the VCP fee for nonamenders in Rev. Proc. 2003-44, which provides for a 50% reduction in the VCP fee if a plan is submitted within the one-year period following the expiration of the plan's remedial amendment period to comply with tax law changes.

Any thoughts would be greatly appreciated!

[Guest erisafried]

:angry:

Good question. I'd like to know the answer to that one myself.

I have been trying to come up with a reason to avoid VCP for this situation but haven't been able to come up with an argument that I think will stand up to scrutiny. The plan doc requirements here seem to be more strict that the statute requires (e.g., why not allow for operational compliance during the plan year with the amendment executed prior to the end of the year)? VCP is an especially annoying prospect when the plan in question has actually been in compliance in operation (i.e., no cash-outs over $1,001 since March 28, 2005), and all we're talking about is the failure to have adopted a one-sentence good-faith amendment by 3/31/05. A ticky-tacky foul at worst, IMHO.

I wonder if the old "adopted effective as of March 31, 2005" approach that soft-pedals the date on which the amendment was actually signed might fly under the radar if the plan was in operational compliance with 401(a)(31)?

Not sure about your situation, but mine involves imminent IRS review (plan termination -- then again, perhaps a reason not to send the plan in), so I need a reasonably bullet-proof solution...which may itself involve biting the VCP "bullet."

Further to this, I noticed that the EGTRRA nonamender provisions in Rev. Proc. 2003-44 could cover the nonamender/terminating plan situation reasonably well, although they do require the extra step of a VCP filing. For a small plan, the costs (with the 50% reduction for prompt action) aren't too bad. Even so, I'd love for someone to talk me out of this approach.

[Guest CMSP]

My situation does not involve imminent IRS review, but is the same in the sense that they have been operating in accordance with the statute. I've put in a call to the general counsel's office of the IRS to see if they can shed any light on what the remedial amendment period is for this situation. If the IRS informs me that it is the default 401(b) RAP, I think I might have a good argument that I can still adopt a retroactive amendment to comply with 401(a)(31). I'll keep you posted.

[Guest erisafried]

FWIW, I heard back from Avaneesh Bhagat (the IRS person in charge of reviewing corrections for the Pacific region), and he said that the EGTRRA nonamender provisions in Rev. Proc. 2003-44 would work just fine for a 401(a)(31) nonamender. Because the fix would be adopted within 1 year after the end of the "RAP" (if that's what March 31, 2005 was for a fiscal year plan), you get 50% off the already low low VCP price (ha!).

[Guest Patrick Foley]

I have a client in a similar situation. An automatic rollover amendment was adopted less than two weeks after the end of the plan year. I believe VCP is available for this situation, but we would rather not incur the cost if the amendment is covered by the ordinary section 401(b) RAP. That approach would leave us at risk if the amendment that was adopted were found defective when we submit for our EGTRRA determination letter, but that is a de minimis risk.

Code section 401(b) itself does not address a change in the law that causes existing plan provisions to fail to satisfy a qualification requirement.

Treas. Reg. 1.401(b)-1 applies only to "disqualifying provisions," as defined in subsection (b), so if the plan's mandatory cashout provisions -- before the amendment -- aren't one of those, we have no RAP. Paragraph (b)(1) doesn't appear to cover a change in the law, and (b)(2), which deal with changes in the law, doesn't cover EGTRRA. That leaves us with (b)(3), which was proposed in 1997 and finalized in 2000 (T.D. 8871). The T.D. states that "a disqualifying provision includes a plan provision designated by the Commissioner, at the Commissioner's discretion, as a disqualifying provision that either (1) results in the failure of the plan to satisfy the qualification requirements of the Code by reason of a change in those requirements; or (2) is integral to a qualification requirement of the Code that has been changed."

Notice 2001-42, section III, designates plan provisions affected by EGTRRA as "disqualifying provisions" if they meet certain requirements AND if a "good faith" amendment (if one is required) is adopted no later than the end of the relevant plan year.

The next paragraph of Notice 2001-42 states that a good faith amendment is required if the plan is required to implement an EGTRRA provision for a year and the existing plan language is inconsistent with the EGTRRA requirement or plan operation under EGTRRA.

These rules appear to be unchanged later releases, although an example in Section 3.02 of Rev. Proc. 2004-25 referring to adoption of good faith amendments by the employer's tax filing deadline made me raise my eyebrows. However, Section 2.09 of Rev. Proc. 2005-66 states that Rev. Proc. 2004-25 "does not extend any other existing plan amendment or determination letter submission deadlines, such as the deadline for adoption of good faith plan amendments for EGTRRA;" I take this to mean that the eyebrow-raiser was an error.

From all this I conclude that the RAP under 401(b) is not available for automatic rollover amendment failure. We have to go to EPCRS to fix it.

I hope someone can point out a flaw in this reasoning; it's not what I wanted.