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Richard Hochman, J.D., MBA McKay Hochman Co., Inc. Andrew E. Zuckerman, J.D. Internal Revenue Service

Workshop 3 Practical Issues Impacting the EGTRRA Restatement and Determination Letter Process. Richard Hochman, J.D., MBA McKay Hochman Co., Inc. Andrew E. Zuckerman, J.D. Internal Revenue Service. Background. Key Documents

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Richard Hochman, J.D., MBA McKay Hochman Co., Inc. Andrew E. Zuckerman, J.D. Internal Revenue Service

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  1. Workshop 3Practical IssuesImpacting the EGTRRA Restatement andDetermination Letter Process Richard Hochman, J.D., MBA McKay Hochman Co., Inc. Andrew E. Zuckerman, J.D. Internal Revenue Service

  2. Background • Key Documents • Rev. Proc. 2005-16: General rules for prototype (M&P) and Volume Submitter (VS) plans, opened up the Pre-Approved DC program. • Rev. Proc. 2005-66: Further spelled out the rules and provided guidance for the individually designed plan program to open on February 1 2006. • Rev. Proc. 2007-44 (restates Rev. Proc. 2005-66): Provided additional guidance on the staggered remedial amendment program. Also introduced concept of “off-cycle pre-approved” plans. ©McKay Hochman Co., Inc.

  3. Rev. Proc. 2007-49: Gave corrective relief under EPCRS to Sponsors who failed to timely submit for EGTRRA DC. (Differentiated those who were off-cycle from those that were late and gave relief to GUST sponsors that were late with their EGTRRA submissions. • Announcement 2008-23: Set forth the two-year pre-approved DC plan restatement period, May 1, 2008 to April 30, 2010. • Rev. Proc. 2008-56: allows off-cycle sponsor submissions, for those that did not previously sponsor a pre-approved plan, if word-for-word adopter of mass submitter document. ©McKay Hochman Co., Inc.

  4. The ability to submit for off-cycle EGTRRA DC Opinion and Advisory Letters has been suspended as of January 15, 2010 so that the IRS can re-program their computers and get ready to issue EGTRRA Pre-Approved DB letters. It is anticipated that the program will re-open sometime later. • There has been no real discussion about a similar ability to submit “off-cycle pre-approved DB plans.” ©McKay Hochman Co., Inc.

  5. THE RAP CYCLES

  6. THE CONCEPT • 5-year staggered RAP for individually designed plans (IDPs) generally based on last digit of employer’s EIN • 6-year staggered RAP for pre-approved plans (prototype and volume submitter plans) based on type of plan (DB vs. DC) ©McKay Hochman Co., Inc.

  7. CUMULATIVE LIST • Each November, the IRS issues a Cumulative List of changes (Notices 2004-84, 2005-101, 2007-3, 2007-94, 2008-108, 2009-98) • Plans submitted during a cycle are reviewed based on the Cumulative List issued prior to opening of the cycle • E.g., The Nov. 2008 list is used to review plans submitted in the cycle beginning 2/1/09 and ending 1/31/10 (Cycle D Plans). ©McKay Hochman Co., Inc.

  8. CUMULATIVE LIST • By making use of the Cumulative List, the IRS only approves items on the List when it reviews new document submissions, including restatements. While other language may be in the document it is not necessarily ruled on. • Since the Pre-approved EGTRRA DC Plans used the 2004 Cumulative List, most guidance issued after late 2004 was not included; with the exception of Roth 401(k) provisions. ©McKay Hochman Co., Inc.

  9. CUMULATIVE LIST • Thus, Final Regulation Section 415 guidance was not included in the EGTRRA pre-approved plans, nor were any of the later enacted laws such as Pension Protection Act of 2006 (PPA), and Heroes Earnings Assistance and Relief Tax Act (HEART). ©McKay Hochman Co., Inc.

  10. CUMULATIVE LIST • Even with individually designed plans, PPA provisions could be incorporated, but the language was not approved until plans submitted starting in February 2009 and later (Cycle D). • Thus, when working with EGTRRA restated documents additional amendments (discussed later) may still be necessary, even if already made to the employer’s GUST document. ©McKay Hochman Co., Inc.

  11. 5-YEAR CYCLE FORINDIVIDUALLY DESIGNED PLANS

  12. 5- YEAR CYCLES FOR IDPs • Staggered RAP based on last digit of employer’s EIN • 5-year cycle applies to all plans not on the 6-year cycle • Defined Benefit • Defined Contribution ©McKay Hochman Co., Inc.

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  14. 5- YEAR CYCLES FOR IDPs • Winter 2009 Employee Plan News • “A question has been raised as to whether the deadline is extended to Monday, February 2, 2009, since January 31, 2009 is a Saturday. Although this does not generally fall within the rules of Code §7503, the IRS will accept an application for a Cycle C determination letter if it is submitted no later than February 2, 2009. Please note that although February 2 is Groundhog Day, this does not give applicants unlimited do-overs as in the movie by the same name.” ©McKay Hochman Co., Inc.

  15. 5- YEAR CYCLES FOR IDPs • The question that follows is will the deadline for the current cycle again be pushed off until Monday, February 1st. Guidance issued between time of drafting and presentation. • This raises the whole issue of deadlines falling on weekends and holidays and when extensions are made to the next business day and when they are not. (ASPPA GAC has sought clarification of this issue.) ©McKay Hochman Co., Inc.

  16. SPECIAL RULES • Multiple employers (Code §413(c)) – Cycle B • Governmental – Cycle C (possibly Cycle E) • Multiemployer (union) — Cycle D • Controlled group, ASG, etc. (Code §414(b), (c), (m), etc.) – Options: • Cycle based on 5500 EIN • Or can elect: • CG Parent’s cycle • Cycle A if multiple plans ©McKay Hochman Co., Inc.

  17. SPECIAL RULES • Related tax exempts can choose parent’s cycle • Changes in business structure (1 year rule) • General 401(b) remedial amendment period still available • Sponsors of non-calendar year plans in Cycle D can wait until Cycle E if they do not want to put PPA in their plans prior to the last day of the 2009 plan year (good-faith amendment needed by last day of 2009 plan year, not the end of the cycle). (IRS Notice 2008-108) will revert to Cycle D for the next submission cycle. ©McKay Hochman Co., Inc.

  18. SPECIAL RULES • Governmental plan can use Cycle C or E for just this first round of cycles (IRS newsletter 11/5/08). ©McKay Hochman Co., Inc.

  19. 6-YEAR CYCLE FORPRE-APPROVED PLANS

  20. 6-YEAR CYCLE • DCs and DBs will be on separate 6 year cycles • Year 1 for DC plans ended 1/31/06 • IRS reviewed in years 2 and 3 and early part of year 4 • Employers restate in years 4 and 5 and early part of year 6 ©McKay Hochman Co., Inc.

  21. NOTES ON 6-YEAR CYCLE • Most sponsors received approval letters at roughly the same time (e.g., 3/31/08 for DC plans) • 2 year EGTRRA restatement period for DCs is May 1, 2008 - April 30, 2010 (Announcement 2008-23) • That period is also the period to submit for a determination letter (optional) ©McKay Hochman Co., Inc.

  22. OPEN QUESTIONS • What happens after April 30, 2010? Will Form 5307 still be accepted? IRS has hinted that only pre-approved DB after that date. • Will newly adopted employer plans be able to submit Form 5307 after April 30, 2010? Hopefully, as the economy recovers there will be new companies to adopt plans. Will they be able to get a Determination Letter or will they have to wait until the next cycle likely beginning around 2014? • Will employers adopting minor changes to Volume Submitter plans be able to submit Form 5307 after April 30, 2010? ©McKay Hochman Co., Inc.

  23. OPEN QUESTIONS • Cycle E Employer on individually designed plan, executes a Form 8905 after April 30, 2010, but before January 31, 2011 deadline, stating their intent to switch to a pre-approved EGTRRA DC plan. • Can they submit for an EGTRRA Letter? • If not, then when would employer’s plan get its first review and for what law, EGTRRA or PPA and beyond? ©McKay Hochman Co., Inc.

  24. 6-YEAR CYCLE • DBs submitted in year 3 (1/31/2008) • Expect DB approval end of 1st Quarter beginning of 2nd Quarter of 2010. • IRS to announce when restatement period will open and how long it will last. ©McKay Hochman Co., Inc.

  25. FORM 8905 • Certification of Intention to use Pre-approved plan • It is good-faith intention; will not work for cash-balance plans, ESOPs, DB plans with 414(k) accounts or other impermissible provisions • Rev. Proc. 2005-66 permitted use as alternative method of entitlement to the 6-year cycle • Rev. Proc. 2007-44 limits use to existing IDP ©McKay Hochman Co., Inc.

  26. FORM 8905 • Do not send to IRS unless submitting underlying pre-approved plan for a determination letter. • Must be executed prior to the end of the employer’s individual 5-year cycle. ©McKay Hochman Co., Inc.

  27. NON-IDENTICAL ADOPTERS • General rule, employer is considered a prior adopter of pre-approved plan regardless of modification. • Anti-abuse provisions – IRS has discretion to determine that 6-year cycle does not apply. ©McKay Hochman Co., Inc.

  28. NON-IDENTICAL ADOPTERS • If modification is to add something not permitted in pre-approved plan (e.g., ESOP or cash-balance), then lose ability to use 6-year cycle in following cycle if amend after 1 year. • If amend within 1 year then not entitled to use 6-year cycle at all. ©McKay Hochman Co., Inc.

  29. NON-IDENTICAL ADOPTERS • If a different amendment, one not prohibited under pre-approved rules, then stay on 6-year cycle even though plan may be considered individually designed, and adopt during the announced window period (e.g. 5/1/08-4/30/10). • Remember any change to a prototype other than completing a different election in the AA (or filling in an approved selection) will result in the plan being deemed an IDP. ©McKay Hochman Co., Inc.

  30. NON-IDENTICAL ADOPTERS • This will cause the plan to submit a Form 5300 rather than a 5307 and the plan will be reviewed based on the most recently applicable Cumulative List rather than the list used when the underlying pre-approved document got its letter. • A volume submitter plan may have changes and still be considered word-for-word identical. ©McKay Hochman Co., Inc.

  31. OTHER ISSUES FOR PRE-APPROVED PLANS

  32. IMPERMISSIBLE PROVISIONS • ESOPs/stock bonus plans • Multiemployer union plan • Cash balance plans • 414(k) plans • Non-ERISA church plans • Prototype multiple employer plans • Prototype governmental plans • Others-see Rev. Proc. 2005-16 6.03 and 16.02 ©McKay Hochman Co., Inc.

  33. Positives From Practitioner Viewpoint 414(s) compensation-operational Correction for failed ADP/ACP test-operational Each person in a group for cross-testing ©McKay Hochman Co., Inc.

  34. Less Positive From Practitioner Viewpoint Election not to participate – No more waivers (prototype only) Use of separate trusts – Must use only approved trusts. Can have several with prototypes. Theoretically, only 1 approved per volume submitter plan submitted. Cross-testing limitations (limits on groups must be reasonable (prototype only); note on earned income) ©McKay Hochman Co., Inc.

  35. CROSS TESTING • Prototypes and Volume Submitters – each person can be in a group (even if entity has self-employed individuals) • Prototypes Only (Listing of Required Modifications #94 and IRS FAQ) • HCEs limited to 25 allocation rate groups • NHCE allocation rate groups based on number of eligible NHCEs • Must be reasonable classification ©McKay Hochman Co., Inc.

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  37. PROTOTYPE CROSS- TESTING EXAMPLE • Plan has 7 eligible NHCEs/5 eligible HCEs • Maximum of 2 NHCE allocation rate groups • Each EE is in a group • Employer can pick which NHCEs will receive 5% gateway each year • Employer can have 1 additional NHCE allocation rate (e.g., 100% rate) as long as grouping is reasonable • Picking person who only worked 1 day may be problem • Picking janitors, even if only 1, may be OK ©McKay Hochman Co., Inc.

  38. 403 (B) PLAN DOCUMENTS

  39. SPECIAL NOTES ABOUT403(b) PLANS • 403(b) plans are not covered by either the 6-year cycle or 5-year cycle • The current deadline to have written plan in place is 12/31/09 • Further extension did not happen, but if plan was in place by end of 2009, then will be able to later go back and correct document. Different if no document by year end 2009. ©McKay Hochman Co., Inc.

  40. SPECIAL NOTES ABOUT403(b) PLANS • IRS announced intention to establish prototype 403(b) program (Announcement 2009-34) • Will not be available for many(?) years • No changes needed to most existing 403(b) documents drafted after the final regulations • Proposal would not permit vesting schedules; church plans, though changes likely in light of comments received. ©McKay Hochman Co., Inc.

  41. SPECIAL NOTES ABOUT403(b) PLANS • If not prototype, then individually designed. However, the IRS does not intend to issue individually designed plan guidance until after the prototype program is opened. • Need to know price and terms of both options to make an informed decision on which is the best way to proceed. ©McKay Hochman Co., Inc.

  42. GENERAL RULES FOR PLAN AMENDMENTS

  43. AMENDMENT TIMING RULES • General Rules Found in Section 5.05 of Rev. Proc. 2007-44 • Service generally will require the adoption of interim plan amendments • Timing is different for adoption of interim amendment vs. discretionary provision • Plan amendment must match operation ©McKay Hochman Co., Inc.

  44. DEADLINE FOR DISCRETIONARY AMENDMENTS • End of plan year in which plan amendment is effective • A discretionary amendment is an amendment that is not a disqualifying provision or integral to a disqualifying provision ©McKay Hochman Co., Inc.

  45. DEADLINE FOR INTERIM AMENDMENTS • Later of: • due date (including extensions) for filing income tax return for employer’s taxable year that includes date on which remedial amendment period (RAP) begins, or • last day of plan year that includes date on which RAP begins • Exception if plan maintained by more than one employer – Last day of 10th month following last day of plan year in which RAP begins ©McKay Hochman Co., Inc.

  46. DEADLINE FOR INTERIM AMENDMENTS • Governmental plan: Later of regular deadline or last day of next legislative session after effective date • Congress may provide alternative date for amendments (PPA, HEART and WRERA). In this case will get to specified date not the due date for tax filing extension. • Example PPA was last day of 2009 plan year without regard to tax filing date. ©McKay Hochman Co., Inc.

  47. TACK-ON AMENDMENTS FOR GUST PLANS • EGTTRA • Post-EGTRRA (includes 401(a)(9) final regulations) • Automatic IRA rollover for mandatory distributions • Final 401(k) regulations • Final 415 regulations (if applicable) ©McKay Hochman Co., Inc.

  48. TACK-ON AMENDMENTS FOR GUST PLANS • Hurricane related amendments (if applicable) • Final NRA regulations • Pension Funding Equity Act (2009) (DB only) Deadline was adjusted from 2008 to 2009 by WRERA ©McKay Hochman Co., Inc.

  49. PREVIOUS DC AMENDMENTS ©McKay Hochman Co., Inc.

  50. PREVIOUS DB AMENDMENTS ©McKay Hochman Co., Inc.

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