If the IRS determines that a plan amendment disqualifies the plan, can the employer get a return of contributions attributable to the amendment?

[Peter Gulia]

Under the Internal Revenue Services procedures, a timing rule applies to an employer that adopts a modification from the pre-approved document that the employer otherwise relies on. Instead of applying for a determination promptly after the employer adopts the modification, one instead waits until the two-year window in which the employer adopts the NEXT pre-approved document. Rev. Proc. 2013-6 § 9.03; Rev. Proc. 2007-44 § 16.

If all goes as hoped, the IRSs approval of the modification gets reliance.

But what if the IRS disapproves the modification?

By the time the IRSs dislike of the provision becomes known, the employer might have made contributions, and the plans administrator might have allocated amounts, for several years.

Looking to the plans provision for a return of contributions upon the IRSs disqualification of the plans trust, may the employer get a return of contributions attributable to the modification?

Alternatively, may the employer end the provision promptly after receiving the IRSs communication that the IRS will not issue a favorable determination on a plan that includes the provision, while not undoing contributions and allocations that were made in good faith (before the employer knew the IRSs view)?

[Kevin C]

Is this a real concern?, or a "what if" question?

I always thought the worst case scenario when you submit as a minor modifier of a pre-approved plan was that they decide you turned it into an individually designed document. I'm having trouble visualizing an allocation method that would satisfy coverage and non-discrimination testing but would cause the IRS to want to disqualify a plan submitted for a letter. If you were trying to add an allocation method that isn't allowed in that type of pre-approved document, for example, amending a standardized prototype to have a new comp allocation, I think you would be considered individually designed. But, I would expect a minor modifier to start with a VS document.

Our VS document has the following provison:

Failure to initially qualify. Employer Contributions to the Plan are made with the understanding, in the case of a new

Plan, that the Plan satisfies the qualification requirements of Code §401(a) as of the Plan’s Effective Date. In the event

that the Internal Revenue Service determines that the Plan is not initially qualified under the Code, any Employer Contributions

(and allocable earnings) made incident to that initial qualification must be returned to the Employer within one year after the

date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by

law for filing the employer’s return for the taxable year in which the plan is adopted, or such

later date as the Secretary of the Treasury may prescribe.

Is this a new plan, or an amendment to an existing plan?

[Peter Gulia]

Kevin C, thank you for the good help.

This is not a hypothetical. In July 2013, I submitted a Form 5307 application for a determination on a plan that is stated by a volume-submitter document and one short modification. Yesterday, the IRS sent me a letter saying that it will not consider the application. The explanation was: "See Rev Proc 2013-6 9.03." I read this to say that one must not submit the modification until the two-year window in which the user adopts the NEXT edition of the volume-submitter document.

The added provision applies beginning with 2013. So by the time the IRS decides whether the modification is fair or foul, the employer/administrator will have made a few years' allocations according to a provision that had not been reviewed by the IRS. While I don't have a particular reason to be worried about whether the added provision disqualifies the plan in form, the point of the determinations procedure is to get certainty.

The modification is an amendment to a previously existing plan.

The volume-submitter document has an initial-qualification provision. But can we extend that idea to a failure of an amendment to qualify? Does it matter that the application for a determination will be the employer's first (because previously it relied on prototype and volume-submitter letters alone)?

The modification/amendment provides an allocation of a nonelective contribution based on a participant's unused vacation hours as at the close of the last day of the plan year.

[Kevin C]

During the 3/13/2014 IRS phone forum, the speaker said the announcement of the 2 year adoption window for DC plans should be out soon. He also said they are trying to stay on the same schedule as last time. The opinion letters for the prior cycle were dated 3/31/2008. Of course, you would have to restate to be able to submit.

Could the client accomplish what it wants to do if you used a new comparability PS allocation with everyone in a separate group? We have clients that do unusual things with their new comp PS allocation.

I don't see anything in our VS document that would allow extending the initial qualification provision to the later amendment of an existing plan. I'm guessing the purpose of the initial qualification provision is to avoid 411(d)(6) issues by not having any benefits accrue unless the plan receives a determination letter when it timely submits for one. I don't know if you could have the same type of provision for a later amendment. If your 2013 amendment did not have such a provision, I would expect your document to say all contributions are allocated and become part of the accrued benefit as of the last day of the plan year. If that is the case, I don't see you being able to retroactively remove those contributions if there are issues when you are able to submit for a letter in 2014 or 2015.

[Peter Gulia]

It turns out that my July 2013 resubmission might resubmit in summer 2014. This morning, I heard that the approvals on volume-submitter documents might be done by late March or early April. Although the window could open as soon as May, I suspect that the makers of the volume-submitter document might need some programming time.

More importantly, I learned that the IRS is aware of the issue I saw: a modification made during a remedial-amendment cycle might have been in operation for a few years before it's up for IRS review; and it might be impractical to unwind allocations and acts done not knowing that the IRS would later disapprove the plan amendment. I learned that the IRS is aware of this problem, and might be considering some administrative relief for an employer seen to have acted in good faith.