Retirement Plans FAQs regarding the September 30, 2003 GUST Remedial Amendment Period Deadline
On June 30, 2003, the IRS issued a News Release reminding employers using Master & Prototype (M&P) or Volume Submitter plan documents that they must update their documents by September 30, 2003, in order to maintain the tax benefits associated with retirement plans.
The IRS extended the deadline for these amendments from December 31, 2002 to September 30, 2003 -- plans that are not amended by this date will be considered "late amenders". Employers with such plans will be jeopardizing the favorable tax status that their retirement plans currently have.
These frequently asked questions and answers provide general information and should not be cited as any type of legal authority. They provide the user with information responsive to general inquiries. Because these answers do not apply to every situation, yours may require additional research.
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Are there any numbers regarding the size of this issue? Say, the number of employers who haven't adopted the updated plans or the number of employees who might be affected?
When adopting these updated plans, the client (i.e., the employer maintaining the plan) communicates directly with the sponsor of the M&P or Volume Submitter plan, not the IRS. Therefore, the IRS doesn’t have an exact count on the number of businesses with “off the shelf” plans who have or haven’t updated their plans. However, sponsors of these plans – financial institutions such as banks, brokerages, insurance companies, etc. – are telling the IRS that many of their retirement plan clients are not adopting the updated plans.
Let’s speculate for a moment. The IRS knows that there are nearly 750,000 businesses with M&P or Volume Submitter plans. Even if 90% of those employers have adopted updated plans, that leaves 10%, or 75,000 businesses, with potentially non-compliant plans. If so, hundreds of thousands of employees/participants would be in non-compliant plans. [Note: Some “off-the-shelf” sponsors have told the IRS that the adoption rate for their clients is substantially less than the 90% figure given in this hypothetical example.]
The tax consequences of such non-compliance for both employers and employees would be considerable.
Why is the deadline September 30th?
The deadline for employers to adopt updated M&P and Volume Submitter plans had been December 31, 2002. This was extended to September 30, 2003, to give employers more time.
Why do these plans have to be amended?
All retirement plans, not just M&P or Volume Submitter plans, must be amended to comply with GUST and EGTRRA.
What are GUST and EGTRRA?
“GUST” is an acronym that stands for a series of four recent tax laws that also made changes to how retirement plans are operated. “EGTRRA” is the acronym for the tax law enacted in 2002.
What sorts of changes are being made to retirement plans because of the amendments required by these tax laws?
The changes impact both employers and employees. Because of GUST and EGTRRA, employers can:
But employers are not the only people who benefit because of retirement plan changes made by GUST and EGTRRA. As a result of these recent law changes, employees can:
How much does this amendment process cost an employer?
Different financial institutions and benefits practitioners will charge different fees to amend their clients’ M&P or Volume Submitter plans. In some cases, a financial institution may not charge a separate fee for amending the plan.
The IRS does not charge employers any fee for amending their plans to comply with the new laws, although there is a fee if the employer asks for its own determination letter from the IRS. For adopters of M&P and Volume Submitter plans, this fee is much less than the fee for individually-designed plans.
What should employers do if they can't afford the fees associated with amending?
They should talk to their plan sponsor or legal advisor about making other suitable arrangements for updating their plan.
What would happen to an employer with one of these plans who didn't adopt the updated version?
Because the plans would no longer be in compliance with the law, the plans could lose their tax-favored status. The loss of tax-favored status could cause a loss of deductibility for the employer’s contributions to the plan.
What would happen to a participant in one of these plans where the employer didn't adopt the updated version?
For the employees, the loss of tax-favored status would mean the employer’s contributions on their behalf could be included in their gross income. Also, the employee’s contributions to their own account (such as in a 401(k) plan) could be subject to tax.
Who should employers contact about getting their plans updated and signed?
The IRS urges employers with M&P or Volume Submitter plans to contact the financial institution or the benefits practitioner that drafted and sponsored their current plan.
What does "a plan's tax-favored status" mean?
A plan that is “tax-favored” is one that the IRS has reviewed and determined satisfies the relevant sections of the Internal Revenue Code. Generally, employer contributions to such a plan are tax deductible and employee contributions are excludable from the employee’s gross income. Also, the earnings on amounts in a participant’s account – such as in a 401(k) plan – grow tax-free until they are distributed, generally, at retirement. As mentioned above, contributions to a “non-qualified plan”, or a plan without tax-favored status, are not deductible in the same manner.
Which employers, as part of this amending process, need to file a "determination letter" request?
An employer needs to file a determination letter request if the employer has made changes to the M&P or Volume Submitter plan beyond those allowed. For example, if the employer makes changes to an M&P plan other than changes allowed through the plan’s adoption agreement, the employer must file a determination letter application by September 30. Also, if an employer makes changes to a Volume Submitter document, other than choosing options under the document, the employer must file for a determination letter application by September 30.
Finally, here’s some background on the extended deadline – September 30 – and filing a determination letter request. As a condition for having the extended deadline, employers must file for a determination letter if their plan is not “identical” to the pre-approved M&P or Volume Submitter plan. If employers don’t file, the September 30 extension is voided and the plan will be a late amender (unless the employer adopted the GUST-approved M&P or Volume Submitter plan by February 28, 2002).
Isn't this issue one that the financial institutions should handle? Is the IRS doing this job for the financial institution?
Part of the Employee Plans mission is to help taxpayers understand their responsibilities and comply with the relevant tax laws. By partnering with financial institutions to help their retirement plan clients we are helping businesses further understand their responsibilities. Also, by helping businesses comply with these recent law changes, the IRS is helping both businesses and their employees to preserve valuable tax benefits.
Does an employer need to amend the plan even if they are no longer making contributions to the plan?
Plans must be amended even if the employer is not currently making contributions.
Does an employer need to amend the plan even if the employer is the only participant in the plan?
Plans must be amended regardless of who is (or isn’t) in the plan.
What if the employer decides to just terminate the plan? Does the plan still need to be amended?
Yes, the plan still has to be amended.
Is there a web site or toll-free telephone number for people who have questions?
Please see EP Customer Account Services for information regarding the various ways to contact us.