Advisory Committee on Tax Exempt and Government Entities (ACT) Analysis and Recommendations Regarding the IRS’s Determ

1. Advisory Committee on Tax Exemptand Government Entities (ACT) Analysis and Recommendations Regarding the IRS’s Determination Letter Program Marcia S. Wagner, Esq. – Project Chair Barbara A. Clark, Esq. Kathryn J. Kennedy, Esq. G. Daniel Miller, Esq. Susan P. Serota, Esq. Michael M. Spickard, EA

2. Introduction • ACT’s EP subcommittee has conducted a comprehensive review of DL program. • Opportune time for such review. • Nearing end of first 5-year Cycle period and first 2-year restatement period for preapproved plans. • Sufficient time has passed for meaningful analysis. • ACT has reached out to all types of stakeholders in the benefits community: • EP specialists, plan sponsors, benefits attorneys, • Actuaries, accountants, TPAs, consultants, • Plan document providers, etc. 2

3. Overview of ACT Report • Report is intended to be of practical importance and significance. • Policy objective is to create a DL program that functions efficiently to promote viability and vitality of our retirement system. • Substantive components of ACT Report • Part III: History/background on DL program • Part IV: IRS’s initial experience with new program • Part V: Practitioner experiences and goals • Part VI: Recommendations on policy issues • Part VII: Recommendations on admin. issues 3

4. History and Background on IRS Determination Letter Program 4

5. Role of IRC Section 401(b) • Rules determine deadline for retroactive amendments for changes in law or guidance. • Remedial Amendment Period (RAP) is from date of such change through the deadline. • “Mandatory” amendments required for legal compliance must be adopted during RAP. • “Discretionary” amendments are not required for legal compliance. • Generally, must be adopted by end of plan year in which first effective (unless it results in a cutback). • Not always obvious if plan amendment is discretionary or mandatory. 5

6. Overhaul of DL Program • Historically, plan sponsors submitted DL filings near end of RAP for major law changes (e.g., TEFRA/DEFRA/REA, TRA ’86 and GUST). • Caused peaks and valleys in submissions to IRS. • Necessitated diversion of IRS resources and manpower to process DL submissions. • Options for change considered in2001: • Option #1 – Eliminate program. • Option #2 – Third party certificate program. • Option #3 – Self certification or registration. • Option #4 – Staggered RAPs over 5 years. • Option #5 – Keep status quo. 6

7. Overhaul of DL Program (cont’d) • IRS adopts 5 year staggered approach. • IRS decides to implement immediate amendment requirement. • Now referred to as the “interim amendment” requirement. • To utilize RAP, plan sponsors must adopt good faith interim amendments. 7

8. IRS’s Initial Experience With New Staggered Determination Letter Program 8

9. Problem Areas for the Service • IRS experiences unforeseen consequences of interim amendment rule. • Dramatic increase in corrections through VCP and Closing Agreements. • Increase in review time by EP determination specialists. • Generally, 1 to 2 hours per case. • Could be up to 5 or more sets of separate interim amendments required for every plan. • Likely to increase case age of each submission. 9

10. Remedial and Interim Amendment Requirements • ACT received 17 responses (roughly 15%) from EP determination specialists surveyed. • Many, but not all, stated that current program was confusing for both sponsors and IRS. • Specific comments on interim amendments. • Deadlines are not clearly articulated. • Up-to-date listing of all interim amendments (with deadlines and effective dates) for each Cycle would be helpful. • Model language could be published for each interim amendment. 10

11. Practitioner Experiences and Goals 11

12. Remedial and Interim Amendment Requirements • Overwhelming majority of surveyed persons spoke negatively about interim amendments. • New process is more difficult to manage. • Results in unnecessary costs to plan sponsors. • Increases likelihood of missing amendment or deadline. • In principle, staggered RAP Cycle approach seemed like a good idea to many. • However, in practice, new program is as cumbersome as the old program. • Interim amendment requirement “needs to be reviewed” and changed. 12

13. Recommendations on Policy Issues 13

14. Policy Considerations • Our private pension system is based on voluntary participation. • Will fail unless plan sponsors have a reasonable expectation of achieving compliance. • Certain aspects of new staggered DL program have created challenges for plan sponsors and practitioners. • Interim amendment requirements are adding stress to the private pension system. • Interim amendment rules and certain other program elements should be examined and reformed. 14

15. Recommendation for Interim Amendment Requirement • ACT recommends adoption of either of following proposals in the alternative: • Proposal #1 - Interim amendments for Core Amendments only. • Proposal #2 - Interim amendments for Section 411(d)(6) benefits only. 15

16. Proposal #1: Core Amendments as Interim Amendments • Must adopt “Core Amendment” by later of: (1) end of plan year in which it becomes effective, (2) due date for employer’s tax return for taxable year in which it becomes effective, and (3) any deadline established by statute. NOTE: Earlier deadline applies if it prospectively reduces Section 411(d)(6) benefits. • Core Amendments include amendments: • Materially affecting BRFs of importance to participants, • Permitting or requiring participant action, • Prospectively reducing Section 411(d)(6) benefits (except as permitted), or • Deemed as such by the Service in its discretion. 16

17. Non-Core Amendments • Must adopt “Non-Core Amendments” by end of Section 401(b) RAP. • Non-Core Amendments include all amendments other than Core Amendments: • Purely ministerial or technical in nature, • Having little impact on number of participants generally (and notice is sufficient for affected participants), or • Where incorporation by reference is permitted. • Examples: • Elimination of gap-period earnings calculation • Section 132(f) fringe benefits in “compensation” • 2009 waiver of required minimum distributions 17

18. Issuing Guidance on Core v. Non-Core Amendments • IRS would issue guidance for changes in law on Core v. Non-Core amendments. • When ambiguity exists, Service would retain discretion to designate as Core or Non-Core. • To determine ease of classifying amendments as Core v. Non-Core, the ACT reviewed: • Required and optional amendments under PPA, HEART and WRERA for Cycle D. • Findings included as Appendix to ACT Report. • Majority of interim amendments were classified as Non-Core. 18

19. Decision Tree Is the change a Deemed Core Amendment? Yes: Needs interim amendment. No: Is it a Section 411(d)(6) Change? Yes: Needs interim amendment. No: Is it a BRF? Yes: Does it have a material effect? No: Non-Core Amendment. Yes: Needs interim amendment. No: Non-Core Amendment. 19

20. Best Efforts Compliance • Plan sponsors would be subject to “best efforts” compliance standard for Non-Core Amendments. • Adoption of Non-Core Amendments may be delayed until end of RAP. • Must use best efforts to ensure operational compliance during interim period. • Must also provide notice to employees summarizing plan changes. • Would provide written record of operational changes. • Intended to be similar to SMM. • May be combined with other communications. 20

21. Proposal #2: Interim Amendments for Section 411(d)(6) Benefits Only • Adoption prior to end of RAP is only required to avoid cutback in Section 411(d)(6) benefits. • Exception if adoption required or permitted in particular year due to specific law or guidance. • All other amendment may be delayed until the end of RAP. • This approach has advantages of simplicity and ease of administration. • “Best efforts” compliance standard for all non-Section 411(d)(6) amendments. 21

22. Recommendations for Clarifying Interim Amendment Deadliness • Publication of new annual notice. • Most helpful if issued in early September. • Would include interim amendment chart with: (1) reference to law, (2) required change, (3) effective date, (4) adoption deadline, (5) whether discretionary or mandatory, and (6) commentary on nature of amendment. • Changes in law/guidance during “gap period” are not considered for DL submission. • Gap period starts with issuance of Cumulative List and ends with start of submission period (Feb 1st). • Interim amendments adopted for changes in law during gap period should be considered. 22

23. Other Recommended Changes • Recommendations for Governmental Plans • Recommendations for Approval Letter Program for Ind. Designed 403(b) Plans • Recommendations for EPCRS Improvements and Coordination

24. Recommendations on Administrative Issues 24

25. Recommendations for Expediting and Streamlining DL Process • “Batch” filings from practitioners with multiple filings (currently do so for 30+ filings). • Issue DL covering interim amendments (when “self-identification sheet” has also been submitted). • Use qualification checklist as Form 5300 attachment. • Eliminate submission “mini-spikes” in each Cycle. • Reduce user fee for filings before July 1st. • Assign different filing dates within assigned Cycle. • Develop and expand “auto closure” procedures for: • 5307 filings for plans with straight-forward design, and • 5300/5310 filings for sole proprietor (and similar) plans. • Create online system allowing internet submissions. 25

26. Recommendations for Customer Service Issues • Tax Exempt Determination System (TEDS) • Develop guidelines for when hard copies may be used by IRS. • Provide proper training to “intake specialists” for TEDS. • TEDS engineers should seek feedback from EP specialists. • Create online database for determination letters. • Provide better training for reviewers to manage information requests and improve consistency. • Use cross-grade staffing for complex cases. • Complex cases are assigned to grade 13 specialists. • Assign grade 11 specialists to work on less difficult aspects of complex cases. 26

27. Other Recommendations • Use the Taxpayer Advocate or EP Specialist “Facilitator” Group for dispute resolution. • Give priority to more off-Cycle DL submissions. • For Cycle-changing events, give choice to employer. • If most recent DL cannot be found: • For individually designed plans, limit document request to prior restatement covered by such DL. • For pre-approved plans, presume prior plan is qualified if employer has evidence of interim amendments. • Provide education on current pronouncements. • Publish more guidance and “top 10” list of mistakes. • Increase staffing level, including variable workforce. 27

28. Conclusion Report was developed collaboratively with IRS. Goal of improving new staggered DL program. Recommendations made after careful consideration of comments from benefits community. Interim amendment rules, in particular, need to be reformed as soon as practicable. 28

29. Advisory Committee on Tax Exemptand Government Entities (ACT) Analysis and Recommendations Regarding the IRS’s Determination Letter Program Marcia S. Wagner, Esq. – Project Chair Barbara A. Clark, Esq. Kathryn J. Kennedy, Esq. G. Daniel Miller, Esq. Susan P. Serota, Esq. Michael M. Spickard, EA A0039765 29