The IRS Continues To Behave Badly

[austin3515]

That is a fact and not an opinion.

http://www.relius.net/News/TechnicalUpdates.aspx?ID=1020

[austin3515]

Although I tend to think there really is not as much change as Sungard suggests (not including their informal conversations with the IRS).

“Except as provided …, a plan will fail to satisfy the requirements of section 401(k)(12) … and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. In addition, except as provided in [the exiting rules], a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(k)-1(b) if it is amended to change such provisions for that plan year.

[Peter Gulia]

Even if one accepts the premise of SunGard's article, one might quibble with its observation that "[m]any practitioners assume the risk in making these amendments[.]"

Relatively few plans are stated on documents for which a firm of lawyers, accountants, or actuaries is responsible. Instead, when a plan's sponsor wants to amend its plan, it puts its service request to the recordkeeper or financial-services business that maintains the pre-approved documents. And that business usually warns that it does not render tax or legal advice.

So it's really the plan's sponsor (and the plan's participants) that takes the risk that amending a plan might also mean unraveling a safe-harbor treatment, which could lead to tax-disqualifying the plan.

[austin3515]

If I do the amendment, and the IRS fines them $10,000 because they added auto rollovers mid-year (like my example?), they're going to sue me.

I suppose to your point I should tell them in my letter, "the IRS has taken a bizarre position, and solely because you would like to add automatic rollovers (scoundrel!) your plan could be disqualified if you execute this amendment. We suspect the IRS is continuing its crusade against republicans in all walks of life, knowing that small business owners (who this rule overwhelming discriminates against) are most commonly affiliated with the republican party."

[Peter Gulia]

austin3515, I share your frustration about some weaknesses of a sometimes inconsiderate law-maker.

You’re a highly capable practitioner. And business owners go to you because you give better advice than the well-intentioned but less smart person who has the customer-service job at the investment house.

So yes, if a document you send involves a risk, you warn your client about the potential consequences – at least those that you know about. (Even if you’re not worried about liability or other blame, you explain the consequences because it’s the right thing to do.)

And you try to set your fees so that your client is paying for the time it takes to give accurate, complete, and thoughtfully considered advice. Or if you choose to set your fees to meet a market, be honest with yourself about the business choices you make.

If it helps to vent about a point that the IRS could manage better, go for it! (You taught me something today.) But a government agency (whether it’s the IRS, EBSA, SEC, or another) isn’t likely to live up to our ideas any time soon. In the meantime, we keep giving good advice, and we let a client make its choices.

[Kevin C]

This topic has generated more fertilizer than any other topic in my 25 years in this business. The premise of the linked article, other similar articles, ASPPA comment letters and comments from some ASPPA speakers is that the IRS has been consistently saying at conferences that absolutely no mid-year amendments are allowed to safe harbor plans except for published exceptions. I've ranted on this before and no one has provided an example of a conference where an IRS speaker actually said this. I have seen several articles and heard several speakers claim that it was said by the IRS at the 2011 annual conference. The session recording proves that claim is false. Now SunGard claims the IRS has been taking this position since 1999. http://www.relius.net/News/TechnicalUpdates.aspx?ID=1004 Having attended the ASPPA annual conferences for 2001-2004 and 2006 to date, if the IRS had actually been making this kind of statement, I would have witnessed it. If this really was the IRS position back to 1999, the final regulations published in 2004 would have reflected it. One of the authors of the final 401(k)/401(m) regulations was a speaker for a couple of sessions at the 2006 ASPPA annual conference, including the DC Q&A session. Having attended her sessions and after speaking with her between sessions, I have no doubt that if that were truly the IRS postion, the final regulations would clearly prohibit all amendments. The regs clearly do not say that. I also find it strange that SunGard is claiming the IRS standard since 1999 has been to prohibit any amendment that would change the SH notice, yet ASPPA GAC sent the IRS a letter last year asking the IRS to impose that as the standard for mid-year amendments.

[Guest A_Dude]

Austin, I think they client would blame you no matter what. You prepared the amendment (even though you warned them of the potential consequeces); they are likely not to accept their own fault. Just because you protect yourself with disclaimers, doesn't mean they still won't sue you. In best case you prove yourself protected, but you still lose because of the headache, money, and time wasted.

Kevin,

That's very insightful to know, since I have not been around that long. That being said, what's the logic for the SH Non-elective notice anyway? They make the contribution irregardless should they choose to defer or not. Plus, they received the SPD and probably other material that explain if any requirements to get the contribution.

[austin3515]

Kevin C, I'm glad to know I am not alone. I have said on numerous other posts that the IRS has not in any written document banned all amendments. They have only deemed certain amendments to be ok, but not to the exclusion of any other.

I do believe Sungard however when they say the IRS's position behind closed doors is that they don't want to see any amendments. But they also said "it remains to be seen whether or not they will enforce this interpretation.

Kevin C and I both took the same position here:

http://benefitslink.com/boards/index.php?/topic/55034-amendment-to-safe-harbor-401k-plan/?hl=%2Bamendment+%2Bsafe+%2Bharbor#entry239595

Here is another one:

http://benefitslink.com/boards/index.php?/topic/54837-401k-safe-harbor-and-mid-year-changes/?hl=safe+harbor+amend+%22participant+directed%22

In the latter I gave the following list of amendments which I think should cause no trouble at all:

But in my opinion, to disallow the following is also ridiculous (as some TPA's do): Automatic rollovers, enhancement of vesting schedule, use of forfeitures, addition of early retirement, addition of auto enrollment (similar logic to EOB's take on eligibility expansions), adition of in-service distributions, addition of loans. (incidentally, perhaps removing loans I would have a problem with because it may have influenced a participants decision to defer, a criteria cited by the EOB).

[shERPA]

What Kevin and Austin said. I've heard IRS answer questions that certain amendments are permissible, it is quite a stretch to take this to mean that anything other than what they've specifically permitted is disallowed. The regs don't say this.

[Bird]

Thanks Kevin for continuing to beat the drum. I don't have as big a problem with the IRS' position as I do with Sungard, ASPPA et al continuing to circularly reinforce a rather draconian position.

[Guest A_Dude]

It's probably Sunguard's position to cover the **** should someone use their advice and get dinged by the IRS who says different. That and causing a stir, gets people to read their atricles, user their name... good ole marketing! ASPPA same thing; cause some interest and get people to contribute so they can win and dine congress.

[Tom Poje]

of course, we still have (from the IRS) in which they clearly state they understand employers are concerned about making changes, and so the announcement says adding a Roth was ok, but then they added the line that comments are requested for additional guidance for mid year changes other than the specific ones mentioned. While I may disagree with the logic between not allowing changes, I'm not sure how you can get around this announcement.

Announcement 2007-59
The Internal Revenue Service has learned that some employers have concerns about adding provisions during a plan year to their § 401(k) safe harbor plans (described in § 401(k)(12) of the Internal Revenue Code) in order to take advantage of recently effective changes to the rules for § 401(k) plans, such as a qualified Roth contribution program (as defined in § 402A) or hardship withdrawals described in part III of Notice 2007-7, 2007-5 I.R.B. 395, when the pre-year safe harbor notice required by § 401(k)(12)(D) does not include information about the added provisions.
This announcement provides that a plan will not fail to satisfy the requirements to be a § 401(k) safe harbor plan merely because of mid-year changes to implement a qualified Roth contribution program (as defined in § 402A) or the hardship withdrawals described in part III of Notice 2007-7.

Comments are requested as to whether additional guidance is needed with respect to mid-year changes to a § 401(k) safe harbor plan (other than changes described in this announcement or in § 1.401(k)-3(f) of the Income Tax Regulations (relating to mid-year amendments to become a safe harbor plan using nonelective contributions) and § 1.401(k)-3(g) (relating to mid-year amendments to suspend or reduce safe harbor matching contributions)). Written comments should be submitted by September 17, 2007. Send submissions to CC:PA:LPD:DRU (Announcement 2007-59), Room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, D.C. 20044. Comments may be hand delivered to CC:PA:LPD:DRU (Announcement 2007-59), Room 5203, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, comments may be submitted via the Internet at notice.comments@irscounsel.treas.gov (Announcement 2007-59). All comments will be available for public inspection.

[GMK]

... to circularly reinforce a rather draconian position.

does this have anything to do with pi day?

[BG5150]

Has anyone seen or heard of the IRS coming down on this stuff in an audit?

[austin3515]

Tom, what part of the notice suggests no other changes are permissible?

My opinion is that the IRS agrees with Kevin C and I (and others) wholeheartedly. And that fact alone has prevented them from issuing published guidance banning the amendments. Instead, they took the backdoor, merely inferring that anything other than the above stated changes would not be acceptable.

[Kevin C]

Bird, that sound you hear isn't a drum, it's my head banging on the proverbial brick wall. You are more generous in your view of ASPPA, SunGard, etc. and their role in this nonsense than I am.

I did a search on the IRS website this morning and found guidelines that the IRS will use in reviewing documents for determination letters. Given that a prohibited mid-year amendment to a SH plan disqualifies the plan, If the IRS really considers virtually all amendments to a SH plan to be prohibited, you would expect the issue to be addressed when they are determining if the plan document meets the qualification requirements.

http://www.irs.gov/Retirement-Plans/Alert-Guidelines,-Explanations-&-Plan-Deficiency-Paragraphs

Here is the 401(k) part.

http://www.irs.gov/pub/irs-pdf/p7335.pdf

The Safe Harbor part starts on page 15.

1.401(k)-3(e) is discussed on page 16:

Generally, a plan that is intended to satisfy the 401(k) safe harbor requirements for a plan year must, prior to the beginning of the plan year, contain language to that effect and must specify the 401(k) safe harbor method that will be used. However, under Regs. section 1.401(k)-3(f), a plan that provides that it will satisfy the current year ADP (and, if applicable, ACP) testing method for a plan year may be amended to specify that the 401(k) safe harbor nonelective contribution method will be used for the plan year, provided special notices are given to employees. Also, a plan that provides for safe harbor matching contributions may suspend such contributions on future elective (or employee) contributions and change to the current year ADP (and, if applicable ACP) testing method for the plan year, provided that the additional notice requirements are met, as specified below, and in Regs. section 1.401(k)-3(g). Under section 416(g)(4)(H), for plan years beginning after 2001, a plan that consists solely of a safe harbor CODA and matching contributions that satisfy the ACP test safe harbor is not subject to the top-heavy requirements of section 416 provided contributions under the plan go to all employees eligible to make elective contributions

[austin3515]

Because what you are saying is that all previous amendments would be reviewed in the process?

[Kevin C]

They will be reviewing all amendments since the last determination letter. The restatement itself is also an amendment. Many restatements are adopted during the year and effective retroactive to the first day of the plan year. If the IRS is really taking the position that virtually all mid-year amendments to safe harbor 401(k) plans are prohibited, why isn't it mentioned in the guidelines for reviewing plan documents? Adoption of a prohibited mid-year amendment means the plan fails to satisfy the coverage and nondiscrimination requirements for 401(k) plans. That is something they are supposed to be looking for before issuing a determination letter.

1.401(k)-3(e) says "In addition, except as provided in paragraph (g) of this section or in guidance of general applicability published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter), a plan which includes provisions that satisfy the rules of this section will not satisfy the requirements of §1.401(k)-1(b) if it is amended to change such provisions for that plan year." 1.401(k)-1(b) has the coverage and nondiscrimination rules.

[austin3515]

Well that's the best darn observation on this topic I've heard yet.

[HCWilliams]

I would like to resurrect this old thread in light of the PPA restatements that we are working on now. What are people's opinions on when the effective dates of Safe Harbor 401(k) Plan Restatements should be? Are you making them all the first day of the NEXT Plan Year. Historically, we have made required Plan Restatements effective on the first day of the Plan Year during which the Restatement is adopted, except for certain specified Plan Provisions which might have special effective dates stated in the document.

I would argue that for many or most Plans, nothing affecting the SH is being changed and maybe even nothing other than the inherent PPA required language changes are being made to the Plan. But a Restatement is still an Amendment so how are folks handling the effective dates?

Thanks,

HW

[Bird]

We are, generally, restating as of the first day of the year in which the restatement is done. Our document provider, Fort William, suggested that is the way to do it. If there happens to be something that we feel is subject to the restrictions on amending SH plans, then we'll either make the restatement date the first day of the next year or make the specific provision effective the first day of the next year.

Comment - for those of you who have your panties in such a bunch over this and think you need to make the date prospective, I hope you get your restatements done by 12/31/15, effective 1/1/16. Doing it near the end of the window, April 30, 2016, would put you in a Catch-22 where it is "too late" to make it effective within that window.

[Kevin C]

We take the same approach as Bird.

I'd also like to point out that this is the second restatement cycle since the final 401(k) / 401(m) regulations were effective. If the IRS really takes the draconian position on all mid-year amendments that certain ASPPA speakers claim, you would expect to see the topic mentioned in the guidance on restatements, with an earlier deadline listed for safe harbor plans. It isn't. As Bird mentions, if you do this long enough, following certain ASPPA speakers' position will put you in a catch-22 situation.

If you feel that restating prospectively by 12/31/15 is the "safe" approach, that is your choice. There is nothing in the published guidance that requires it, but there is nothing in the published guidance that prohibits it.