Determination, Opinion and Advisory Letter for Retirement Plans – Recurring Plan Issues Found in Determination Case Review
As part of the Service's overall commitment to provide efficient, high-quality customer service, Employee Plans is currently involved in a broad-based effort to streamline determination case processing at every level. This effort involves a major redesign of the forms used to apply for determination letters as well as an expansion of the reliance on opinion and advisory letters issued for master and prototype and volume submitter plans that will reduce the number of employers who have to file a determination letter request. See Ann. 2001-77 (as modified by Rev. Proc. 2011-49) for additional details. See also Rev. Proc. 2007-44 and Rev. Proc. 2013-6.
Employee Plans would like to ensure that employers receive their determination letters in correct form and as quickly as possible, but if we have to request corrections to plan provisions the process is delayed.
In an attempt to avoid these delays, we have identified frequently recurring defects in plan language that require corrective amendments and delay case closure:
Plans are not amending for the final 415 regulations as required by the 2006 cumulative list, Notice 2007-3.
Plans submitted for Cycle B and later don’t have the required language regarding age and form adjustments effective for limitation years beginning on or after July 1, 2007.
Defined Benefit Plans must contain language for the adjustments to the dollar limitations under IRC 415(b)(1)(A) if they provide a retirement benefit that begins before age 62. Dollar limit adjustments must be made in accordance with IRC 415(b)(2)(C), 415(b)(2)(E)(i) and (v) and Regulations 1.415(b)-1(d).
Defined Benefit Plans must contain language for adjustments to the dollar limitation if the plan provides for benefits that commence after 65. Dollar limit adjustments must be made in accordance with IRC 415(b)(2)(D), 415(b)(2)(E)(iii) and Regulations 1.415(b)-1(e).
Defined Benefit Plans must contain language for when benefits are payable in a form other than a straight life annuity, and the form of benefit is not subject to IRC 417(e)(3). These benefit adjustments must be made in accordance with IRC 415(b)(2)(B), 415(b)(2)(E)(i) and Regulations 1.415(b)-1(c).
Defined contribution plans still include correction methods for excess annual additions in 1.415-6(b)(6) of the 1981 regulations. However, the final regulations issued in 2007 deleted the permitted correction methods that were in the 1981 regulations. Plans that include a correction method in the event a participant would exceed the annual additions should be amended to delete the language effective for limitation years beginning on or after July 1, 2007.
All plan types often fail to update for final regulations 1.415(c)-2(e)(3)(i) and (ii). These regulations require certain post severance compensation to be included as 415 compensation, while other post severance compensation may optionally be included.
Plans continue to include language that allocates excess annual additions into a suspense account. Section 1.415-6(b)(6) of the 1981 regulations included the use of an unallocated suspense account as a permissible correction method for resolving excess annual additions. However, the final regulations issued in 2007 deleted the permitted correction methods that were in the 1981 regulations. Plans that include this correction method in the event a participant would exceed the annual additions will need to be amended to delete the language effective for limitation years beginning on or after July 1, 2007.
All plan types frequently contain an incorrect definition of Top-Heavy Ratio. Distributions made to the participant during the one-year period ending on the determination date must be added to the present value of the cumulative accrued benefit. However, if a distribution is made for a reason other than severance from employment, death, or disability, the five-year look back period is used. Often, plans incorrectly refer to “separation from service” but should instead refer to “severance from employment.”
401(k) Plans - IRC 414(v)(5)(A) provides that an “eligible participant” for purposes of making catch-up contributions means a participant in a plan who would attain age 50 by the end of the taxable year. Some plan documents erroneously refer to the “plan year” rather than the “taxable year.”
Some plans are still providing for the use of “targeted QNECs” and “targeted QMACs” to correct ADP test failures. If a plan permits using QNECs and QMACs to correct ADP test failures, it must provide that disproportionate contributions will not be taken into account. See Regulations 1.401(k)-2(a)(6)(iv) and 1.401(m)-2(a)(5)(ii) respectively.
Added Note Regarding PFEA
Notice 2005-101, the 2005 Cumulative List, included the changes enacted by PFEA 04 and Notice 2007-84. However, due to the extension granted by PPA 06 and WRERA 08, plans do not have to amended until the last day of their 2009 plan year. Consequently, specialists should not be requesting amendments required by PFEA in their review of Cycle B or Cycle C applications. Cycle D applications may be reviewed for this requirement. See Section IV of Notice 2005-101.
Added Note Regarding PPA and WRERA
PPA 06 enacted a series of qualification changes to existing law, generally effective as of the first day of a plan’s 2007 plan year. However, Congress deferred any amendment requirement for these changes until the last day of their 2009 plan year. In December 2008, Congress enacted WRERA ’08, which extended this time period for many provisions until the last day of the 2011 plan year (2012 for governmental employers.) Consequently, plans will not be reviewed for PPA 06 requirements until Cycle D submissions (see note above) and for WRERA until the next Cycle A submission period, although that might be the subject of future guidance.