Employers with qualified retirement plans are required to periodically amend and restate their documents to stay in compliance with all legal requirements.
Documents used by employers include individually designed plan documents; prototype plan documents sponsored by mutual funds, insurance companies and banks; and volume submitter plan documents sponsored by financial institutions, consultants or law firms.
A prototype plan includes a basic plan document with a separate adoption agreement whereby employers may elect the provisions they desire.
Prototype plans include standardized adoption agreements with few choices, or nonstandardized adoption agreements, which have greater flexibility for employers to design their qualified retirement plans.
In the past, employers were required to submit determination letter requests to the IRS during certain periods. The periods during which plans needed to be amended for various tax acts, such as the Economic Growth and Tax Relief Reconciliation Act of 2001, are referred to as remedial amendment periods.
The IRS created a staggered determination letter program to spread the work of the IRS over a period of years and to free up resources to perform retirement plan audits.
The staggered periods to submit individually designed defined contribution and defined benefit retirement plans for determination letters are based upon a plan sponsor's Employer Identification Number, based on a five-year cycle (see chart for details).
We're currently in Cycle E for employers with EINs ending in five or zero. These employers must amend and restate, and submit their individually designed retirement plans to the IRS for determination letters prior to Jan. 30, 2011.
Sponsors of prototype plans had their profit sharing and 401(k) plan documents approved by the IRS and received Opinion Letters from the IRS on or before April 30, 2008. Employers can rely upon the Opinion Letters and do not need to obtain individual determination letters.
However, employers who wanted their own individual determination letters had until April 30, 2010 to submit their plans for an individual determination letter on IRS Form 5307.
Employers using prototype plans can choose to rely on the Opinion Letter to maintain a qualified retirement plan but most experts recommend employers get individual determination letters to have greater comfort regarding the qualified status of a retirement plan and to minimize questions from accountants and other professionals.
Smaller employers tend to rely on the Opinion Letter. Since the April 30, 2010 date has passed, most employers need to consider alternatives if a determination letter wasn't obtained for a prototype plan and to confirm that current documents are being maintained to preserve the qualified status of a retirement plan.
The alternatives available to employers using prototype plans include:
* If a plan document that received an April 2008 IRS Opinion Letter was executed by April 30, 2010, and all prior interim amendments were properly and timely executed and dated, no action need be taken, and an employer may rely upon the Opinion Letter of the prototype sponsor from the IRS.
* If an employer adopted an EGTRRA adoption agreement by April 30, 2010, and still wants a favorable determination letter, such action cannot occur (except for certain employers in disaster areas). If the employer's plan is in compliance with all legal requirements, the determination letter process has closed for DC prototype plans (although the program for DB prototype plans has recently opened). The IRS is considering alternatives for such employers, but no immediate action is anticipated.
* If the employer's EIN happens to end in five or zero, the employer may still submit a prototype plan for a determination letter on IRS Form 5300 as an individually designed plan until Jan. 31, 2011.
* For employers in disaster areas - certain counties in Alaska, Connecticut, Massachusetts, Mississippi, New Jersey, Rhode Island, Tennessee and West Virginia - relief has been extended under IRS Notice 2010 until July 31, 2010 to both adopt EGTRRA amendments and submit prototype plans for determination letters.
* Lastly, if an employer missed an interim amendment and/or has other document errors, the employer can file the plan under the IRS Voluntary Compliance Program. The employer may pay a user fee of either $375 as a nonamender (in limited circumstances) or the regular user fees (which range between $750 for plans with 20 or fewer participants to $25,000 for plans with over 10,000 participants). The employer will then receive a compliance statement stating that the late adopted amendment will be treated as having been adopted by the deadline for the particular amendment. However, the compliance statement will not be considered a favorable determination letter with regard to the amendment (unless the employer is still eligible to separately file for a determination letter).
Whether or not an employer has obtained an individual determination letter, reviewing plan documents is always prudent. Employers should periodically prepare a simple matrix identifying the status of all amendments and plan documents.
This matrix is helpful to confirm the status of an employer's plan and to identify if any document deficiencies exist.
This is particularly important if an entity anticipates a sale or other corporate event in the future, since lack of compliance with retirement issues can often result in purchase price adjustments, funds being escrowed to correct errors or can even stop corporate transactions from closing.
Employers also should periodically review their vendors and the administration of their retirement plans to confirm that the administration is consistent with plan documents.
Particularly if an employer is filing under VCP as a nonamender, consideration of administrative errors, such as excluding eligible participants, determining proper contribution and vesting, warrant serious review to ensure that as many issues as possible are identified and included in the VCP submission, since the fee paid to the IRS is the same regardless of how many errors are described. The VCP filing may easily be expanded beyond a nonamender filing for additional compliance issues, with the payment of the same user fees.
Bottom line: Despite all the attention on health care reform, employers should still attend to their qualified retirement plans to avoid future compliance problems.
Contributing Editor Frank Palmieri, CPA, JD, LL.M (Taxation) is a partner with the law firm of Palmieri & Eisenberg, with offices in Princeton, N.J. and Alexandria, Va. He is a national speaker and writer on employee benefits issues and is a fellow in the American College of Employee Benefits Counsel.
Sponsor EIN Ending In Cycle Period to Submit Plans for EGTRRA Determination Letters
1 or 6 A February 1, 2006 to January 31, 2007
2 or 7 B February 1, 2007 to January 31, 2008
3 or 8 C February 1, 2008 to January 31, 2009
4 or 9 D February 1, 2009 to January 31, 2010
5 or 0 E February 1, 2010 to January 31, 2011
