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Fixing Common Plan Mistakes - Failure to Timely Adopt Interim Amendments

The Problem

The Commissioner establishes deadlines for plans to be amended for legislative changes to the Internal Revenue Code. After the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the IRS adopted a two-tiered approach on this issue.

First, the IRS generally requires an interim amendment to incorporate a law change to be adopted by the later of:

  1. The due date (including extensions) for filing the income tax return for the employer's taxable year that includes the date in which the law change first became effective; or

  2. The last day of the plan year that includes the date in which the law change first became effective.

Second, if the plan sponsor timely adopted such an amendment in good faith, then the plan sponsor is able to take advantage of an extended deadline to adopt amendments required to ensure that the plan document complied with the applicable law change. Thus, if interim amendments were adopted timely and in good faith, but did not fully comply with the requirements of the applicable law change, then the plan has an extended period of time (typically referred to as the “remedial amendment period”) to adopt amendments necessary to ensure compliance with the applicable law change.

If the plan sponsor does not timely adopt interim amendments then:

  1. The plan document will not be timely amended for the law change that requires such amendment, resulting in the plan document no longer satisfying the qualification requirements of the Internal Revenue Code; and
  2. The plan sponsor will lose the use of the extended remedial amendment period to adopt amendments that may be required.

Interim amendments include one or more of the following:

  1. The good faith EGTRRA amendments described in Notices 2001-42 and 2005-5;

  2. Amendments required for compliance with the final and temporary regulations under section 401(a)(9), relating to minimum distributions, as described in Rev. Proc. 2002-29 (as modified by Rev. Proc. 2003-10); and

  3. Interim amendments described in section 5 of Rev. Proc. 2005-66. (Note: Rev. Proc. 2005-66 has been updated and superseded by Rev. Proc. 2007-44.)

An interim amendment does not include any amendment adopted to correct a failure to operate the plan in accordance with the plan’s terms. For example, if a plan provides for a 6-year graded vesting schedule and the plan operated on 3-year cliff vesting schedule, a corrective amendment providing for a 3-year cliff vesting schedule is not an interim amendment.

In addition, an interim amendment does not include any amendment adopted to comply with legislation for which the remedial amendment period has already expired. Thus, an amendment adopted to bring a plan into compliance with GUST or any other previous legislation is not a good faith or interim amendment.

The Fix

If the failure to adopt interim amendments timely is discovered before the plan is submitted to the Service for a determination letter application, and if the plan is not the subject of an Employee Plans examination, the failure may be corrected under the Voluntary Correction Program (VCP) described in Rev. Proc. 2006-27.

Generally, if a plan is correcting one or more failures under VCP, the fee is determined by the fee schedule under section 12.02 of Rev. Proc. 2006-27. However, if the sole failure being corrected for the plan under VCP consists of the failure to adopt interim amendments, then the required fee is $375, regardless of the size of plan, number of amendments or number of years involved (see section 12.03 of Rev. Proc. 2006-27).

For a VCP failure that consists solely of the failure to adopt interim amendments, the application should be made using Appendix F of Rev. Proc. 2006-27. Appendix F is both a submission and, when approved by the IRS, a compliance statement that sets forth the IRS’ enforcement resolution with respect to the failure being corrected. Appendix F specifies the information that needs to be submitted for it to constitute a complete application. If the information is satisfactory, the IRS will sign the compliance statement and return it to the plan sponsor and/or authorized representative. The compliance statement does not express an opinion on the content of the amendments, but it signifies the Service’s agreement to treat the interim amendments as if they were adopted timely for the purpose of making the remedial amendment period available to the plan.

The combined application and compliance statement is designed to be part of an expedited process. Often these submissions are worked through completion without being assigned to individual agents.  To facilitate the expedited response, it is critical that all of the information required by Appendix F is submitted in the format provided. Modifications to the format increases the time it takes to ensure that sufficient information was submitted to issue a compliance statement and increases the odds that information may be missing.

Examples of errors in prior submissions include the following:

  • Missing basic information such as plan name, plan number or employer identification number;  
  • Changing the Appendix F format that eliminates key sections;
  • Plan sponsors’ representatives erroneously signing the “Plan Sponsor’s Representations” section of the Appendix F instead of the plan sponsors;
  • Failing to include copies of the signed plan amendments adopted to correct the failure;
  • Incorrectly completing and signing Forms 2848 (Power of Attorney and Declaration of Representative) or 8821 (Tax Information Authorization);
  • Failing to include a copy of the most recently filed Form 5500-series return;
  • Submitting Appendix F on either the plan sponsor’s or power of attorney’s letterhead.

It is expected that the submission follow the format provided under Appendix F without modification. It is also critical that Appendix F be properly completed and that information requested under Appendix F be provided. Incomplete submissions may be returned to the applicant without further review. These errors can be easily prevented!

Making Sure It Doesn’t Happen Again

Employers need to have a system in place to ensure that their plan is timely amended for all new laws.  A review of all current law changes should be made annually.  Law changes and their compliance dates are widely advertised in government and practitioner publications.

However, keep in mind that, despite all of your good efforts, mistakes can happen.  In that case, the IRS can help you correct the problem and retain the benefits of your qualified plan.

Page Last Reviewed or Updated: 25-Mar-2014