Retroactive amendment, self-correction, pre-approved plan - determination letter?

[t.haley]

Client has a pre-approved 401k plan.  Recently discovered error allowing early inclusion of noneligible employees following purchase of company.  Employees of purchased company were allowed to enter plan immediately; however, plan requires one year of service.  Client would like to retroactively amend plan to allow immediate entry into plan for these employees in conjunction with the purchase.  Rev. Proc. 2016-51, Appendix B, Section 2.07 allows correction by plan amendment and requires submission of the amendment to the IRS for a determination letter.  Section 6.05 states that determination letters shall not be submitted with the VCP application and addresses determination letters and pre-approved plans under VCP or Audit CAP (but does not mention SCP). Can anyone confirm for me that if we correct through SCP with a retroactive amendment to a pre-approved plan whether we are required to submit the amendment (i.e. the plan) for a determination letter?  

[ETA Consulting LLC]

No, you shouldn't have to submit to a determination letter.  That wasn't the thinking when that was written.  Here's how I have it pieced together.

Technically,
Having a determination letter was never a condition for plan qualification.  It WAS and IS always prudent to have one because one thing you forego without a determination letter is the ability to Self Correct (even the most insignificant) errors.  With that said, the idea of not having a favorable determination letter was never considered an option; even though you could (technically) have a qualified plan without one.

So, the rule is basically saying if you use SCP to retroactively amend a plan to reflect the early entry of several employees, then not having a favorable determination letter is not an option; so you would need to submit for it.  If you're already on a pre-approved plan, it's a non-issue altogether.

This is how I frame it.

Good Luck!

[Luke Bailey]

Section 4.05(2) of Rev. Proc. 2016-51 is the operative provision, and it provides for correction by plan amendment under SCP in this situation, as "set forth in section 2.07 of Appendix B." My recollection is that the prior EPCRS Rev. Proc., 2013-12, which of course pre-dated the new limitations on the issuances of DL's under Rev. Proc. 2016-37, set forth generally in the rules of the Rev. Proc., not just Appendix F, specifically, in Section 6.05(1) of Rev. Proc. 2013-12, that in the limited situations where SCP by plan amendment was permitted, the plan was required to be submitted for a DL, whether it was pre-approved or not. It seems that all that verbiage was removed from the main part of the Rev. Proc. when 2016-51 was written, but the reference to submission of the amendment for a DL was left in in the example in section 2.07 of Appendix B. I wonder if that might have been an oversight by IRS, since requiring DL submissions in the limited situations where you can correct by amendment under SCP seems inconsistent with the IRS's general policy decision to drastically limit the situations in which DLs will be issued. You might want to check this point by calling someone in the voluntary compliance group at IRS.

[AKconsult]

I spoke to an IRS agent about this same question (Paul Hogan), since I do think the Rev Proc is confusing on this point.  He response was that if the plan document is a prototype document with an opinion letter, then a retroactive amendment can be done without having to submit for a determination letter as long as the amendment is that you are choosing something that would be otherwise permissible on the adoption agreement.  In other words, the client could have had that provision in the plan based on the plan's selections, so it can be amended retroactively and no need to file. If the retroactive amendment to conform the document to what was done in practice would require the employer to add language that doesn't fit on the model document or requires some sort of unique language that throws the plan out of prototype status, then you need to get a determination letter. 

 

Don't forget that retroactive amendments done as self correction (without a filing) are only permitted for certain operational errors:  contribution calculated on pay over the compensation limit; employees allowed into the plan too soon; and hardship or loan failures.  Thanks! 

[Peter Gulia]

AKconsult, thank you for a helpful explanation!

 

[ETA Consulting LLC]

This is consistent, because even when you retroactively amend under VCP, the items on the VCP Application would be filled out stating that you're not filing for a Favorable Determination Letter and the reason is that you're written to a Preapproved Document.

Good Luck!

[t.haley]

Thank you all for your responses.  They were very helpful!