IRS Continues Its Trend Of Anti-Plan Sponsor Interpretations

[austin3515]

Place this just behind the prohibition of using forfeitures for safe harbor contributions, which holds the number 1 spot on the list of most ridiculous policy positions ever. This one is a close second, though.

http://www.mhco.com/BreakingNews/APartialTermRev_082213.html

Please tell me someone has something to contradict this, or that ASPPA will be writing a letter??

[KED]

Don't get me started on this one . . . under the IRS interpretation, someone who is terminated for embezzling from the employer gets rewarded with full vesting. With a Form 5310 application some years back, partial termination issues arose. We argued that participants who were terminated for cause (e.g., failed drug testing, stealing, etc.) should not be considered or fully vested. We provided back-up for the terminations and the IRS did not make us fully vest.

[austin3515]

It would be one thing if a clear public policy was being served, but it really only serves to penalize the Employer for having the audacity to reduce its work force when the economy sours.

Hey, remember that guy who quit and stole 10 of your clients? Guess what! He's 100% vested and you owe him $5,000!! Maybe MH will give us the name and number of the author so our clients can call him or her...

[Belgarath]

According to Sal, internally the IRS has been training agents to require only the involuntarily terminated participants in the applicable period to become 100% vested.

My observation - whether this is correct, or when it will actually happen if ever, or whether it will be consistently applied, is anyone's guess.

[austin3515]

Is anyone planning an article to refute? This seems like a night and day inconsistency. Also, what do the actual regs say on partial plan terminations? Shouldn't the regs control? Seems like an inadvertent grammatical error (and the pride of the rev proc author which was too great to admit such a stupid mistake) has turned the rules upside down.

[Kevin C]

The Rev. Ruling itself has a pretty good description of what the Code and Regs say.

LAW

Section 411(d)(3) provides in relevant part that a plan will not be qualified unless the plan provides that, upon its partial termination, the rights of all affected employees to benefits accrued to the date of such partial termination, to the extent funded on that date, or the amounts credited to their accounts, are nonforfeitable.

Section 1.411(d)-2(b)(1) of the Income Tax Regulations provides that whether or not a partial termination of a qualified plan occurs (and the time of such event) is determined by the Commissioner with regard to all the facts and circumstances in a particular case. The facts and circumstances include the exclusion, by reason of a plan amendment or severance by the employer, of a group of employees who have previously been covered by the plan, as well as plan amendments that adversely affect the rights of employees to vest in benefits under the plan.

Section 1.411(d)-2(b)(2) provides a special rule with respect to a defined benefit plan that ceases or decreases future benefit accruals under the plan. A partial termination is deemed to occur if a potential reversion to the employer maintaining the plan is created or increased as a result of such cessation or decrease. This special rule does not apply to defined contribution plans.

Section 1.411(d)-2(b)(3) provides that, if a termination occurs, § 411(d)(3) only applies to the part of the plan that is terminated.

Our VS documents mirror the code language saying that affected participants become 100% vested. I can't think of any scenario where a termination not initiated by the employer would be someone affected by the partial plan termination. Given the choice between following the language in our IRS approved document or following the article advice, I think I'll pick the document.

[Belgarath]

I'm not disputing your interpretation of what is correct, (I agree with you) but do you really want to pick a fight with the IRS on this, that you might lose? Do you advise your client to take this interpretation, or do you present both sides of the issue and make them choose?

Just curious.

[austin3515]

So if that's what they say the code and regs say, isn't silly that they are contradicting the code and regs so obviously?

"The facts and circumstances include the exclusion, by reason of a plan amendment or severance by the employer"

I'm sorry, but I don't think you added enough emphasis

[austin3515]

Belgarath, I'm surprised by your last post considering your prior post that the IRS is training it's staff to do it "correctly" (i.e., vesting involuntary terms only).

[Belgarath]

I'm not sure why you would be surprised. Let me ask you - do you advise your clients to ignore what is (apparently) the current IRS position? In spite of Sal's comment, you have the offsetting comment in the MCHO release, which purportedly came from discussions with IRS personnel. Or, do you present both sides and give them a choice?

I'm not saying advising your clients one way or the other is right or wrong. However, I do happen to believe that arguing with the IRS can be risky and counterproductive. If the IRS either takes the (what we all believe) incorrect interpretation, or if they are inconsistent internally, which also happens, then I'm just not sure it is a "good" risk, and I was curious as to how people handle this.

Personally, I'm pretty conservative (see cowardly) on these issues, and I'll freely admit I'd make the client choose.

[austin3515]

I tend to have the clients who look to us for recommendations. We advise of the risks, to be sure. What I'm still trying to determine is which statement has more credibility? On the one hand, you have someone who sits around writing Rev Procs (and sometimes forgets to include important words ), and on the other hand, you have field agents who are actually enforcing the rules. I'm leaning towards the latter, assuming Sal is to be taken at his word (even though I'm getting it 3rd hand!).

[PensionPro]

Does anyone know where the term "affected participants" or "affected employees" is defined in the code/regs/IRS ruling?

[Kevin C]

I thought following the terms of the plan document was the "conservative" option. Ignoring the document language and following the article's advice could be viewed as an operational failure.

To me, it's very similar to the other situation Austin referenced. The IRS is now saying forfeitures can't be used for SH contributions, but there are many documents that say forfeitures reduce the SH contribution. Isn't this kind of problem one of the reasons documents are submitted for opinion or determination letters?

If "affected employees" is defined, I can't find it.

[austin3515]

Probably because the word affected can be looked up in any two-bit dictionary to find that someone needs to be impacted by the event to be "affected." If I quit in June, and my plant is closed in August, by what definition of the word "affected" am I an affected employee?

[PensionPro]

Not that I agree with the IRS position. If the code/regs do not define "affected employees" and the plan document does not define "affected employees" it leaves the plan open to the IRS' and the courts' interpretation of who the affected employees are. You have a good argument if your plan document defines who the affected employees are.

According to the IRS 'dictionary,' employees who terminated during the applicable period whether voluntarily or involuntarily are affected because the termination happened during the applicable period. Your termination in June may have been in anticipation of the plant closing in August Not that I agree with the IRS position, but I am trying to find language in the code/regs that would contradict this IRS interpretation.

[Belgarath]

I have to think that the chance of the IRS ruling it an "operational error" if you fully vest such a participant is remote. Certainly I would classify that as a lower risk than ignoring the (apparently) current IRS position.

Again I return to the issue, not of what is "correct" or not, but how much is it worth to your client to potentially have to fight this out with the IRS. If it is two participants and $450.00 of what should be forfeitures, it hardly seems worth it. (If they are determined to fight it out just on principle, and hang the expense/consequences, then that's a different matter.) If it is a large plan, with $48,000 of what should be forfeitures, then perhaps it is worth retaining counsel and going all the way, assuming that fighting it through normal channels doesn't produce a favorable result.

I do hope that the IRS will clean up their act on this, and stop taking this ridiculous position - and assuming Sal is correct, then at least some movement on this issue is taking place.