Nonamender Failures and the Voluntary Correction Program (VCP)
One of the most common qualification failures currently resolved under the Voluntary Correction Program (VCP)1 is the nonamender failure occurring in individually designed plans. The term “nonamender failures” includes failures to adopt timely required good faith plan amendments under the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16 (EGTRRA good faith amendments), interim, and certain other plan amendments.
Types of Nonamenders
The IRS, through published guidance (most recently in Rev. Proc. 2007-44, 2007-2 C.B. 54), has established various deadlines applicable to qualified retirement plans for employers to adopt amendments that are required as a result of changes in qualification requirements2. A change in a qualification requirement includes a statutory change or a change in the requirements provided in regulations or other guidance published in the Internal Revenue Bulletin. This article focuses primarily on failures to adopt plan amendments timely for:
EGTRRA good faith amendments,
interim amendments, and
discretionary amendments that are related to changes in the qualification requirements.
EGTRRA Good Faith Amendments
Notice 2001-42, 2001-2 C.B. 70, provided a remedial amendment period (RAP) under §401(b) of the Internal Revenue Code (Code) (ending no earlier than the end of the 2005 plan year) in which any needed retroactive remedial plan amendments for EGTRRA had to be adopted (the EGTRRA remedial amendment period)3. The availability of the EGTRRA remedial amendment period was conditioned on the timely adoption of required good faith EGTRRA plan amendments. The EGTRRA remedial amendment period also applies to certain other disqualifying provisions, such as plan provisions that must be amended to reflect the final regulations under §401(a)(9), which relates to minimum distribution requirements.
Interim and Discretionary Plan Amendments
Interim amendments include both:
amendments required to be made to a plan as a result of changes to qualification requirements that are effective after December 31, 2001, and
integral amendments - amendments that a plan sponsor chooses to adopt that are integral to both a change in the qualification requirements and to a plan provision that is required to be amended as a result of a change to the qualification requirements.
As with the EGTRRA good faith amendment requirement, the effect of timely adopting an interim amendment that is adopted in good faith with the intent of maintaining qualified status is the eligibility of the employer for an extended RAP– to the end of the plan’s applicable remedial amendment cycle (cycle) – in which to correct good faith mistakes in the plan document related to such amendments.
Discretionary amendments are plan amendments other than interim amendments. Discretionary plan amendments include:
amendments that a plan sponsor adopts as a result of a change in the qualification requirements, that are neither required nor integral, and
amendments made to a plan that are not related to a change in the qualification requirements.
A plan sponsor that chooses to implement a change to its plan that would require a discretionary or integral amendment, but that fails to adopt that amendment on a timely basis has caused an operational failure in its plan under EPCRS, as, assuming the plan document is otherwise correct, the plan sponsor has changed its operation to be inconsistent with the terms of the plan document. However, for purposes of administrative simplicity, under VCP, the IRS has elected to treat failures to adopt timely discretionary amendments that relate to a change in the qualification requirements and integral amendments in the same fashion as EGTRRA good faith and nonamender failures related to required interim amendments4. This means, for example, that under VCP, a plan sponsor that has incurred an operational failure with respect to a discretionary amendment that relates to a change in qualification requirements or an integral amendment may correct that failure through the adoption of a retroactive amendment. For purposes of this article, these discretionary amendments and integral amendments will be referred to as “optional amendments.”
Relief for Nonamender Failures under VCP
Applying for relief under VCP for nonamender failures is simple. For example, submissions limited to EGTRRA good faith, interim and/or optional amendment failures are provided a streamlined VCP application procedure under Rev. Proc. 2008-50. Under this streamlined process, a plan sponsor submits Appendix F, with Schedule 1 attached5. If the application format has not been modified from the IRS’s sample format in Appendix F and the following have been submitted, the IRS will sign and return this document to the plan sponsor:
documents required by Appendix F;
applicable schedule;, and
a correctly completed application.
That signed Appendix F constitutes the compliance statement with respect to extending the plan’s RAP.
The fee for a VCP submission that is limited to EGTRRA good faith, interim, and optional amendment failures is a flat $375 instead of the standard compliance fee based on the number of participants in the plan, as set forth in Section 12.02(1) of Rev. Proc. 2008-506. For your convenience, the IRS has posted fill-in documents (in Adobe Acrobat format), including Appendix F and its accompanying schedules, on the Correcting Plan Errors web page.
Under VCP, the resolution of an EGTRRA good faith, interim, or optional amendment failure results in the corrective amendment being treated as if it had been adopted timely for purposes of determining the availability of the extended RAP described earlier. Thus, a plan sponsor can resolve these failures under VCP only while the plan’s applicable cycle remains open. Once the plan’s applicable cycle closes, these failures are not accorded the treatment described, because once the applicable extended RAP expires, there is no relief to grant. Once the applicable cycle has expired, the plan sponsor should use Appendix F, Schedule 2 to resolve its nonamender failures.
Appendix F, Schedule 2 applies to all nonamender failures other than EGTRRA good faith, interim and optional amendments covered under Schedule 1. Unlike failures submitted under Appendix F, Schedule 1, resolution of failures submitted under Appendix F, Schedule 2 includes a determination as to whether plan provisions comply with the qualification requirements. The fee for nonamender failures submitted under Appendix F, Schedule 2 is determined under the fee schedule contained in section 12.02(1) of Rev. Proc. 2008-50. However, pursuant to section 12.03, the fee in that schedule is reduced by one-half if the submission is made within one year of the expiration of the plan’s cycle.
Appendix F: Which Schedule Should You Use?
The following examples illustrate the correct appendix (and schedule, if applicable) to be used when submitting a nonamender failure under VCP. These examples assume that a VCP submission is being made during the current cycle (Cycle D).
Example1: Cycle E filer with a plan that was a nonamender for GUST7; and various EGTRRA good faith and interim amendments.
The plan sponsor should submit Appendix F along with Schedules 1 & 2. The compliance fee would be determined by section 12.02(1) of Rev. Proc. 2008-50. The $375 fee is not applicable, since the failures in the VCP submission were not limited to EGTRRA good faith, interim, or optional failures. The 50% reduction in the compliance fee in Rev. Proc. 2008-50, section 12.03 is not applicable, since more than one year has elapsed since the expiration of the plan’s GUST RAP.
Example 2: Cycle C filer with a plan that is a nonamender for various EGTRRA good faith and interim amendments. The VCP application was submitted after January 31, 2009, the date on which Cycle C expired.
Since Cycle C has expired, the nonamender failures cannot be submitted using Appendix F, Schedule 1. Instead, the plan sponsor may use Appendix F, Schedule 2. The compliance fee would be determined under section 12.02(1) of Rev. Proc. 2008-50. If the VCP submission is made to the IRS by January 31, 2010, the 50% fee discount in Rev. Proc. 2008-50, section 12.03 would apply.
Example 3: Cycle D filer with a plan that has a nonamender failure for various good faith and interim amendments. No other issues are included with the VCP submission.
Since Cycle D has not expired, the plan sponsor should submit Appendix F, Schedule 1. The $375 fee would be applicable.
Example 4: Cycle E filer with a 401(k) plan that provided for financial hardship distributions based upon IRS specified safe harbor events decided that, due to the expansion of allowable events set forth within the final 401(k) regulations that were generally effective as of January 1, 2006, it would allow hardship distributions to be made to plan participants to pay for burial or funeral expenses for the participant’s parent, spouse or children starting on July 1, 2006. Between July 1, 2006 and December 31, 2008, several hardship distributions were made by the plan to participants on account of such burial or funeral expenses. However, the plan was not amended to permit this type of hardship distribution until 2009.
For EPCRS purposes, this would be accorded the same treatment as an EGTRRA good faith or interim amendment nonamender failure. The plan sponsor may submit Appendix F, Schedule 1, and if it was the only issue submitted under VCP, the $375 fee would be applicable.
When Should Appendix D be Used?
If (1) at least one failure in a VCP submission is not covered by Appendix F, Schedules 1-9, or (2) the plan sponsor is not following the correction methods for failures covered in those schedules, the plan sponsor should use the sample submission form set forth in
When is a Determination Letter Application Required under VCP?
Under certain circumstances, a determination letter application may also be required to be submitted to the IRS along with a VCP submission.
If the VCP submission contains only EGTRRA good faith, interim, or optional failures, a determination letter application should not be filed with the VCP submission. If the plan is on-cycle, however, the plan sponsor should ensure that a determination letter application is filed with the Cincinnati Submission Processing Center by the end of the applicable cycle. For all other nonamender failures, a determination letter application is required along with the VCP submission and both items must be mailed to the address in Washington, DC8. This is true whether or not the plan is on-cycle or off-cycle.
Under certain circumstances, operational and demographic failures are permitted to be corrected through a retroactive plan amendment9 that either modifies plan provisions to reflect the way the plan was operated or corrects a nondiscrimination failure. If the plan is off-cycle when such a failure is submitted under VCP, the plan sponsor should not submit a determination letter application with its VCP submission. If the plan amendment is accepted as a proper correction for the failure, the compliance statement under VCP will constitute a determination on the effect of the plan amendment on the qualification of the plan; however, the compliance statement is subject to the condition that the amendment be submitted as part of a separate determination letter application to the Cincinnati Submission Processing Center during the plan’s on-cycle year (or if earlier, in connection with the plan’s termination), and that a favorable determination letter be issued with respect to the plan. If the plan is on-cycle when the operational or demographic failure is submitted under VCP, the plan sponsor should generally submit its determination letter with the VCP submission. However, if the VCP submission is submitted early in the plan’s cycle, and the plan sponsor wishes to submit its determination letter application at the end of the plan’s cycle, the plan sponsor may submit its VCP submission and request that the IRS not require a determination letter application to be processed along with the VCP submission.
Pursuant to Rev. Proc. 2008-50, section 6.05(1), if a determination letter is required under the revenue procedure, then, unless otherwise specified, the provisions of Rev. Proc. 2007-44 apply. Thus, for example, in the case of an ongoing individually designed plan, a determination letter application will be reviewed with respect to all items of the Cumulative List (as defined in Rev. Proc. 2007-44, section 4) that would apply to the cycle during which the determination letter is filed. A determination letter application is not required if correction by plan amendment is achieved through the adoption of an amendment that is designated as a model amendment by the IRS or the adoption of a prototype or volume submitter plan with an opinion or advisory letter as provided in Rev. Proc. 2012-6, on which the plan sponsor has reliance.
The following chart summarizes the requirement to submit a determination letter application under VCP:
Type of Qualification Failure
Off-Cycle Sponsors of Individually Designed Plans
On-Cycle Sponsors of Individually Designed Plans
|Nonamender failures with respect to EGTRRA good faith, interim and optional amendments.||No determination letter (DL) application required. Corrective amendments to be included with subsequent on-cycle DL filing along with copy of the VCP compliance statement.||No DL application required. Corrective amendments to be included with on-cycle DL filing along with copy of the VCP compliance statement.|
|Nonamender failures other than EGTRRA good faith, interim and optional amendments.||DL application required. The DL application must be included with the VCP submission and mailed to Washington DC. Plan must comply with the cumulative list in effect on the date the application is mailed to the IRS.||DL application required. The DL application must be included with the VCP submission and mailed to Washington DC. Plan must comply with the cumulative list in effect on the date the application is mailed to the IRS.|
|Operational and demographic failures that are corrected via retroactive plan amendments.||No DL application required. Corrective amendments to be included with subsequent on-cycle DL filing to Cincinnati Submission Processing Center, along with copy of VCP compliance statement.||DL application required and must be included with the VCP submission mailed to the Washington DC address.|
1VCP is part of the Employee Plans Compliance Resolution System (EPCRS). The current rendition of EPCRS can be found in Revenue Procedure 2008-50, 2008-35 I.R.B. 464.
2See Rev. Proc. 2007-44, section 5.
3 Rev. Proc. 2007-44 extends the EGTRRA remedial amendment period for individually designed plans to the end of a plan’s initial applicable five-year remedial amendment cycle.
4See Rev. Proc. 2008-50, section 6.05(3).
5Only the schedules that are applicable to a submission need to be submitted with the VCP application. So, in the instance of a VCP application with an interim failure only, only Schedule 1 need be attached to the submission. Schedules 2-9 need not be submitted.
6See, also, Rev. Proc. 2008-50, section 12.03.
7The term “GUST” refers to the following: the Uruguay Round Agreements Act, Pub. L. 103-465; the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103-353; the Small Business Job Protection Act of 1996, Pub. L. 104-188; the Taxpayer Relief Act of 1997, Pub. L. 105-34; the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206; and the Community Renewal Tax Relief Act of 2000, Pub. L. 106-554.
8See Rev. Proc. 2008-50, section 11.13.
9See Rev. Proc. 2008-50, section 6.05(3)(b).