Determination Letter Program Reopened to Certain Existing Plans

The IRS has opened up its plan determination letter program to a limited number of existing individually designed plans in Revenue Procedure 2019-20.  The IRS had indicated in various forums that the agency would begin to reopen its determination program to cover certain existing plans.  Until this procedure, the program had been limited to new individually designed plans and those that were looking for a letter at the time the plan was being terminated.

A determination letter is a ruling from the IRS that the language of the plan is in compliance with the requirements for the plan to be treated as a qualified retirement plan.  While the letter does not cover issues that may arise with operation of the plan, it does assure that if the plan is operated in accordance with the plan document and other provisions of the law that it should not be at risk of losing its qualified status—in which case it would no longer be a tax exempt trust. 

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IRS Revises EPCRS Guidance with Main Changes in VCP Program Application and Payment

A 120-page revision to the Employee Plans Compliance Resolution System (EPCRS) has been issued by the IRS in Revenue Procedure 2018-52.  This system involves three distinct programs that deal with compliance issues arising in qualified retirement programs.  These programs are:

  • Self Correction Program (SCP)

  • Voluntary Correction Program with IRS Approval (VCP)

  • Audit Closing Agreement Program (Audit CAP)

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Regulations Modified to Allow Use of Forfeitures to Fund QMACs and QNECs

The IRS has published final regulations (TD 9835) that modify the requirements for qualified matching contributions (QMACs) and qualified nonelective contributions (QNECs) for employer retirement plans.  These regulations are adopted essentially unchanged from the proposed versions issued in January 2017.

These payments are used to deal with issues that arise when an employer initially runs the ADP and/or ACP tests for a retirement plan and discovers the plan does not comply with one or both tests for the plan year.

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List of 2017 Required Amendments Issued by IRS

The IRS has issued the 2017 required amendment (RA) list for individually designed qualified retirement plans (Notice 2017-72).  Despite the name of the document, the required amendments listed in this document are not required to be made by the end of 2017, but rather must be made generally by December 31, 2019 (the end of the remedial amendment period), although some governmental plans may qualify for a later date (see Rev. Proc. 2016-37).

The IRS changed the required amendment period, effective January 1, 2017, with the issuance of Rev. Proc. 2016-37.  As the current notice describes the new system contained in Rev. Proc. 2016-37:

Sections 5.05(3) and 5.06(3) of Rev. Proc. 2016-37 extend the remedial amendment period for individually designed plans to correct disqualifying provisions that arise as a result of a change in qualification requirements. Under section 5.05(3), the remedial amendment period for a plan that is not a governmental plan (as defined in § 414(d)) is extended to the end of the second calendar year that begins after the issuance of the RA List on which the change in qualification requirements appears. Section 5.06(3) provides a special rule for governmental plans that could further extend the remedial amendment period in some cases.

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IRS Expands Qualified Plan Hurricane Relief to Now Cover Those Affected by Hurricane Irma as Well as Harvey

In Announcement 2017-11 the IRS has provided special provisions to allow qualified employer retirement plans to make Hurricane Harvey related distributions and/or loans.  Following Hurricane Irma, the IRS in Announcement 2017-13 expanded the relief to cover those impacted by Hurricane Irma.

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IRS Allows Retirement Plans to Allow Those Affected by Hurricane Harvey to Receive Loans and/or Hardship Distributions Under Simplified Procedures

In Announcement 2017-11 the IRS has provided special provisions to allow qualified employer retirement plans to make Hurricane Harvey related distributions and/or loans.

The general relief is described in the notice as follows:

…[A] qualified employer plan will not be treated as failing to satisfy any requirement under the Code or regulations merely because the plan makes a loan, or a hardship distribution for a need arising from Hurricane Harvey, to an employee or former employee whose principal residence on August 23, 2017, was located in one of the Texas counties identified for individual assistance by the Federal Emergency Management Agency (“FEMA”) because of the devastation caused by Hurricane Harvey or whose place of employment was located in one of these counties on that applicable date or whose lineal ascendant or descendant, dependent, or spouse had a principal residence or place of employment in one of these counties on that date.

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ESOP Failed to Cover Employees of Related Corporation, Plan Disqualified

Qualified retirement plan provision in the IRC generally give controlling owner-employees a trade-off—they can benefit under the plan, but only to the extent that an appropriate benefit is offered to the “rank and file.” Not surprisingly, some owners, attempting to maximize their benefit and avoid the cost of funding for other individuals, have attempted to establish structures to “isolate” the rank and file outside of the organization whose employees are covered by the program while still obtaining their services. And, similarly not surprisingly, the law has provisions meant to address such structures.

This type of arrangement was challenged by the IRS in the case of Paza Staffing Services v. Commissioner, Docket No. 6881-12R and is the subject of an unpublished order and decision published on August 17, 2017.   The plan in question was an employee stock ownership plan (ESOP) established by a corporation controlled by Dr. Zapolanski.

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IRS Allows Retirement Plans to Allow Those Affected by Hurricane Matthew to Receive Loans and/or Hardship Distributions Under Simplified Procedures

In response to Hurricane Matthew the IRS in Announcement 2016-39 granted the option to qualified plans to give access to retirement funds to individuals impacted by the disaster without requiring certain the plans to go through certain verification procedures required of such plans when making loans or hardship distributions.

Employer retirement plans of various sorts (§§401(k), 403(b) and 457) must follow certain procedures in order to make distributions or loans to account holders.  Distributions can only be made upon the occurrence of certain events that the IRC allows, and then only if the plan itself allows for such a distribution. As well, distributions will generally be subject to tax except to the extent the distribution consists of already taxed amounts.

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IRS Makes Form 5500-EZ Delinquent Filer Relief Program Permanent

In Revenue Procedure 2015-31 the IRS has made permanent, with some changes, the pilot program it created in Revenue Procedure 2014-32 for a late reporting relief program for certain retirement plans not eligible to participate in the Department of Labor’s Delinquent Filer Voluntary Compliance (“DFVC”) program.  Generally these plans are “one-participant” and foreign plans.

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Rules Provided for Permitted Mid-Year Changes in Safe Harbor 401(k) Plans

Notice 2016-16 provides a vehicle under which mid-year changes can be made to a safe-harbor §401(k) plan that will not be held to violate the safe harbor rules.

A major complicating factor when attempting to operate a §401(k) retirement plan in small and mid-sized businesses arising from the need to meet tests meant to insure that the benefits aren’t utilized to a significantly larger extent by the highly compensated employees (HCEs) as compared to non-highly compensated employees.  Elective contributions made by highly compensated employees are subjected the actual deferral percentage limitations (ADP testing) while an actual contribution percentage test (ACP testing) is applied to matching contributions and employee contributions.

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Failure to Follow Anti-Alienation Provisions in Dealing With Account Balance in Divorce Causes Disqualification of ESOP

Sometimes it’s difficult to get clients to understand that when Congress gives a tax break, they impose conditions that must be met to maintain that break.  That’s especially true with items such as retirement plans where some or all of the funds in there are, in the client’s view, my money that can be dealt with just like any other of my property.

In the case of Family Chiropractic Sports Injury & Rehab Clinic, Inc. v. Commissioner, TC Memo 2016-10, the taxpayer’s failure to respect the requirements to maintain a qualified retirement plan proved fatal to the hoped for tax benefits.

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Impact of Obergefell Decision on Retirement and Health and Welfare Plans Detailed by IRS

In Notice 2015-86 the IRS issued guidance regarding the effect of the U.S. Supreme Court’s ruling in Obergefell v. Hodges on retirement plans and health and welfare benefit plans.

Generally the ruling notes that since the federal government was required to recognize same sex marriages that were valid at the time entered to following 2013’s decision by the United States Supreme Court in the case of United States v. Windsor there is a very limited impact of the Obergefell decision.

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ESOP Disqualified Due to Failure to Comply with Law and Plan Document

[Revision - February 5, 2016.  At the request of the taxpayers involved we have removed the names of the individuals from the Tax Court opinion paragraph cited below.]

A number of bad consequences will follow from the IRS finding that a purportedly qualified retirement plan wasn’t actually qualified.  In such a case the trust will generally be treated as a taxable entity rather than a tax exempt one.  As such, the IRS does not often take this drastic step, but it did in the case of DNA Pro Ventures, Inc. v. Commissioner, TC Memo 2015-195.

The corporation argued that the IRS action was an abuse of discretion in this case, but the Tax Court did not agree.

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IRS Plans to Issue Regulations Prohibiting Defined Benefit Plans From Offering to Accelerate Annuity Payments Being Made to Satisfy Required Minimum Distribution Rules

In Notice 2015-49 the IRS announced that it proposes to amend the regulations related to required minimum distributions under IRC §401(a)(9) to provide a defined benefit plan will generally not be permitted to replace any annuity being paid with a lump sum payment or other accelerated form of distribution.  The IRS plans to make these regulations effective generally as of July 9, 2015.

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Plan Fiduciary May Be Held Liable for Failing to Properly Review Costs of Investment Options Offered

In the case of Tibble v. Edison Int’l, US Supreme Court No. 13-550, reversing and remanding in part 711 F.3d 1061 as revised in 729 F. 3d 1110 CA9 the United States Supreme Court looked at the period of time a plan fiduciary may be held liable for a breech of fiduciary duty related to the selection of investments made available to qualified plan participants.  The Supreme Court, in a unanimous opinion, found that the District Court and Ninth Circuit had applied too restrictive a standard in determining when the clock began running on the statute of limitations.

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