Overview of the 2012 Cumulative List of Plan Qualification Changes
Note - Any federal tax advice contained in this transcript is intended to apply to the specific situation described and should not be considered official guidance independent of the presentation. The tax advice and statements contained herein should not be relied upon for retirement planning purposes without first consulting a tax or retirement planning professional. This transcript has been edited for technical accuracy and may differ slightly from the audio recording of the Overview of the 2012 Cumulative List of Plan Qualification Changes. This information is current as of February 28, 2013. Since changes may have occurred, no guarantees are made concerning the technical accuracy after that date.
John Schmidt: Hello everyone. I'm John Schmidt. I'm the staff assistant from IRS Employee Plan Customer Education Outreach. I'd like to welcome you to our phone forum entitled Overview of the 2012 Cumulative List of Plan Qualification Changes. Thank you for joining us. Today, we'll be hearing from Donald Kieffer, IRS Employee Plan Senior Tax Law Specialist.
Before we start, I would like to point out a couple of things. If you had registered for this program and you attended the entire live forum, you will receive a certificate of completion by e-mail in about a week. Enrolled agents, enrolled retirement plan agents, and enrolled actuaries are entitled to continuing education credit for this session.
Other types of tax professionals should consult their licensing organization to see if today's session qualifies for continuing education credit. As with all of our presentations, the comments expressed by our speakers should not be construed as formal guidance from the IRS.
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You heard enough from me. Without further ado, here is our speaker, Don Kieffer.
Don Kieffer: Okay, thank you John and good afternoon everybody, or good morning for those of you on the West Coast. As John mentioned, I'm going to cover an overview of the 2012 Cycle Fee Cumulative List. If you've taken a look at the hands-out presentation material, I've prepared, it's about a 31 or 32-page PowerPoint. I'm going to go through it from front to back.
The agenda--and where I'm going to start – is on page 3 which will begin with a very quick overview of our current Determination Letter Program, where we are today, what type of applications we're reviewing, what are the timeframes you could expect to hear back from us from your submission.
Then I'm going to go into two changes to the program that affects cycle fee submission. The first is in our annual Rev. Proc. 2013-6. I'm sorry. I just caught my typo. For those of you looking at it on slide 3, it should be Rev. Proc. 2013-6. That's our annual procedural filing guidance and we come out with this every year and it lists the procedural requirements to submit a letter during that cycle. I'm going to cover a couple of these substantive changes that were put in place for Cycle C.
I'm also going to briefly touch on EPCRS as it affects concurrent determination letter submissions. Now, we just did two prior phone forums over the past two weeks on EPCRS. I'm not going to go into EPCRS very broadly, but I just want to very briefly touch on the changes for determination letter submission in the cycle. Then the bulk of today's presentation, I'm going to go over the cumulative list, IRS Notice 2012-76. What I'm going to try to do is go down the list, cover each of the items that are new for this year. I'll give you a brief overview of each piece of guidance, and then most importantly, tell you what things we think do or don't raise amendments or change concerns for the plan document for this cycle.
On each item, I'll try to give a little bit of an overview of the technical issues involved and then tell you whether you have to do a plan amendment or not. If I have time at the end, I'll try to cover some future possible changes to the program. I know we've talked publicly about looking at or exploring updates to Rev. Proc. 2007-44 which is the Staggered Determination Letter Guidance and also an eventual 403(b) pre-approved ruling program. I'll try to give you a brief heads-up as to what I think will come down the pike there.
Then I want to leave about 10 minutes for questions and answers. I have a number of questions that were submitted in advance. Again, unfortunately, due to the size of today's audience, I can't take anyone live, but if you do have any questions about anything I cover today, you can send me an e-mail. If you look at slide 2, my name, firstname.lastname@example.org is my e-mail address. You can send me an e-mail about anything that I discuss that you have a question about.
For those of you that just sent in questions in advance, if I don't get to work it into presentation or I'm not able to pick it up in the last 10 minutes, I'll try to definitely get back to you either tomorrow or early next week with an individual answer.
With that, let's go to slide 4 and then I'll talk very quickly about where we are right now with the Determination Letter Program. In the first five-year cycle that was the EGTRRA remedial amendment period from 2006 until last year, so two years ago, we got about 132,000 submissions. That includes basically all of the form types, 5300, 5210, 5307; about 132,000 for the five-year cycle. We had another 16,000 in the second Cycle A and another 14,500 or thereabouts in the second Cycle B. That's 160,000 cases over the course of seven years.
For Cycle C thus far, we've only got about 4000 cases so far. If the current cycle holds true to formas to the first round, we're probably expecting another 13 or 14,000 cases through the end of January 31st of 2014. All totaled for the first eight years of the Staggered Determination Letter Program, the IRS would be working with about 170,000 to 185,000 submissions. That's a lot of work coming in for relatively small staff employees to do it.
Where are we today in general with resolving all of this work? Well, if you look on slide 4, we're generally into Cycle E submissions for a more complicated work. Our more complicated work is generally going to be cases that have complicating features such as a Demonstration 6 because you've got to test it for non-discrimination. A cash balance design may be paired with a paired profit sharing plan in an offset arrangement, or a stand-alone conversion, large employers with large employee demographic bases, those and other more complicated cases we're roughly working in the middle of Cycle E.
For our less complicated submissions and for terminations, we're into Cycle--the second Cycle A and even into Cycle B on some of them. We're generally much further ahead with our less complicated work than with our complicated work. Really the only reason accounting for this is just our staffing levels. We have our work divided out across our employee base, not in a proration that's favorable for a higher grade of work which we generally tend to lag behind.
Now, about a year and a half ago, I did a phone forum on the Determination Letter Program with regard to ESOPs. I think if I remember correctly, at that time we were about two cycles behind. I don't remember exactly where we were. I don't remember when I actually did it, but I think we're about two cycles behind the curve compared to our individually designed plans. Now, in the last year and a half, we've a major effort to try to resolve a lot of our older cases of which many of them happened to be ESOP arrangements and have significantly closed up the gap so that our ESOPs are just a little bit behind our more complicated individually designed submissions, not the two years that we used to have. We did that really by putting some more resources there and trying to streamline our review process. I think in 2013 and then eventually 2014, we would expect to see to close up that gap. I don't find the thing. We do have a status board on our webpage where we'd tell you based on what type of submission type, what dates we are currently reviewing, and in fact, that we have a separate line for ESOPs. We've got to eventually get rid of it, the fact that we have a separate line for ESOP is the problem in and of itself.
Now, let's go to slide 5. In addition to all of it and reviewing all of these individually designed cases, we're right now in the middle of about the "two-ish" year window for reviewing pre-approved lead plan defined contribution submissions. These are submissions of lead plans that came in under our procedural guidance, the Rev. Proc. 2011-49. If you look at the six-year staggered cycle, you have a front end of about a one-year window to submit the lead plans to us.
At the back end, we've got about a two-year window for the adoption of employers and then that gives us the 9-year--with a fraction of the 3rd year of legal room to review them, get them finished, and issue the advisory letters.
Right now, we're in the middle of that. If we stay true to form and follow the timeframes that we've had in the first two submission cycles, right now then, that would give us a target day to complete this in the first federal fiscal quarter of 2014. Usually, it would be like November or December when we're finishing off the last couple of stragglers. In January, we're getting ready to issue the last of the preliminary e-mail notifications and gearing up to issue out all the advisory letters. Again, if we hold true to form that would give us a target date of March 31st, 2014 to issue opinion and advisory letters and then a two-year window beginning April 1st and ending March 31, 2016. That's if we can make our internally set objectives and I think at this point we're pretty optimistic we'll get there.
Now, just a brief note, I'll touch on IRS Announcement 2011-82 a couple of times this afternoon. That two-year window ordinarily would be the time in which you would submit to the service forms 5307 for all these adopting employers. Now, it's going to be the time where unless you have a volume submitter document that has made minor modifications, that allow you to stay on the volume but come into the IRS on a 5307 as a modifier, unless you're one of those people, that two-year window is going to be your adoption window. It's not going to be your submission window.
Okay, here's what I'm going to cover for the remainder of this afternoon. I'm going from the bottom up on page 6. If I have time, I'll talk a little bit about 403(b) and give whatever I can say about when I think we're going to get something out on 403(b). Momentarily, I'm going to cover, like I said, the 2013-12 changes only as they apply to Cycle C determination letter submissions. I'm going to, in a moment, mention 2013-6 and the changes we made for inbound filings, and then the rest of this afternoon I'm going to cover the List itself. I'm going to go down each entry on the list.
Now, I just want to make a very brief word about the way we organize because you're not familiar with it; for presentation purposes, how we depict the Cycle C List. In general, what we do is list out by code section. We'll start with 401(a), 411, 415, 417, and then under each code section we'll list the different guidance or law changes that are applicable or relative to that section. If you look at the list itself, you'll see several items are listed repetitiously if it affects more than one code section. What I've done today, what I'm going to cover, is the new items that are issued new for Cycle C. Again, even if you'd go to the list, you'll see that the new items tend to repeat. I'll talk about one for example that affects 411, 415, 417. With the three times on the list, I'm going to cover it once and tell you how it affects all three code sections at the same time.
Going to slide 7, let me talk about the substantive changes that were made for Cycle C inbound determination letter submissions. The first part is at Section 7.04 where we try to clarify what documents we want you to submit when you bring in a determination letter case. What we say there, to summarize the change, is come in with your current plan document and bring in also the plan document that's associated with the remedial amendment period that's immediately in front of it. Now, this is really not a policy change of the Service. It actually is just to articulate in the Rev. Proc. guidance that we have had in what we call a "Quality Assurance Bulletin." We have about 12 to 15--I don't remember the exact number--instructional guidance items that we give to our determination letter reviewers. Although they're styled as internal documents, we actually make them publicly available. Go to www.irs.gov/ep and just type in the search box "quality assurance bulletin." The first link will get you to the landing page. On there is one entitled "Verification of Prior Plan Documents in Absence of a Letter." I think that it's a second or third one on the list.
That one has for years said, "Send us this document and allow us to verify the remedial amendment period in front of it." That has always existed in that quality assurance bulletin. What we did in this change in 2013-6 is to bring that principle up into the submission filing.
The second change is with regard to the elimination of something called a working copy. Now, I have in front of me one, two, three--I got about four questions on working copy alone and I really wasn't going to cover this, but since I've got so many questions, I think I'll have to give a little bit of clarification and I'll go back and answer them later. When a case is brought into the Service, you have to give us the current plan document to review and rule on. That current plan document has to be something known as a "restatement." The easiest way to think about this is imagine your plan document. You have the front page as the cover page. The back page is the signature page and in the middle is 60 or 70 pages of the legal documents, tax and benefits, and provisions of the plan. Okay, that's the restatement.
Again, we're only talking for the moment about individually designed plans. You have to give us your restatement, and this provision at section 7.05 is there to aid the IRS' readability of your plan. We're trying to speed up our ability to get through and decipher, and understand how all the plan's provisions connect and work together. You have to give us a unitary synthesized document that has all of this in one place. We don't have to go out to various loose amendments to get this.
What you can bring in to the IRS is either this restatement like I said, which is this 70-page document executed by the client that's going to be used to administer the plan. You could also send us a proposed restatement which is just the restatement unsigned. This will work obviously if you submit it before or at the last day of the plan's remedial amendment cycle. Frequently, we get proposed restatements with the understanding that this document that's submitted is going to go through a lengthy review process by the service. We're going to come out and make contact and ask for changes.
Frequently, you'll bring that into us in proposed form. Under the regulations, you have 91 days until we issue to adopt, whatever becomes the final product. Those are two of the three things that you could bring into us. One is the restatement. One is the proposed restatement. The thing that we have eliminated is this third thing that we called a "working copy", and I think this has been in the procedures--I can remember going back about 1992--and to understand the working copy. Think for a moment that there are a number of plans that don't administer the plan pursuant to a single written plan document or don't have a unitary expression of the plan's benefits and forms, and different eligibility and allocation provisions ring out in all one place.
Think for a moment of the governmental plan where some of them are administered just with statutes or ordinances and don't even have a written document at all, or where you have a collectively bargained plan that may, if it's covering a large union--doesn't have all of this in one place. They may have a book telling union membership "How You Get Into the Retirement Fund." Okay, that's the eligibility. Another handout that they may give out says "Here is the requirement period to enter" That is the eligibility section. You have another to take money out of the plan saying "Here's what you'll get when you retire." Well, that constitutes the distribution provision. They have a book that says if you do this type of a job, you'll get this much of a credit. That becomes the allocation section.
You have what constitutes the plan all the place in several different documents. The working copy was kind of like a depictional "what if". If you took all of this together and created a restatement that's not going to be used to administer the plan--it's not going to be executed by anybody. It's just going to come in to the service as the depictional document as to how all this stuff would work together. That would be bringing in to us a working copy.
I think we've had that in our procedure since about 92. If I recall correctly, around 2003, we started actually giving caveats on the determination letter where we would say, "This letter considers and rules on the working copy." Previously, we wouldn't even do that. We would just look at this and then evaluate all of the other secondary amendments. What we've done here is to eliminate the ability to do that. Quite frankly, it is only because we try to eliminate issues. We've got one document that supposedly depicts the others and now there's conflict and there are the issues if we rule on one. The others would use to administer the plan, whether we give reliance on. So to bring any document for the Service now requires you to bring us either that restatement or a proposed restatement. We will have to decide what we're going to do with governmental plans, as to whether we may have to make a limited exception.
I'm going to cover more about restatements when we get into the end of the Cycle C list, when we talk about 436, and I'll also take this up in a couple of questions. Next change, 9.03 of the Rev. Proc. says-as I mentioned earlier about two or three slides ago on slide 5 -you have this targeted window. Let's say right now it's going to be April 1st, 2014 to March 31, 2016. Let's say that's going to become the dates to adopt. That's the only period in which we're going to take 5307s. You've got a two-year window to adopt. If you're eligible to file, you have got to come in during that two-year window only. No jumping the gun. If you're submitting outside that, we're not going to take it.
That's the only two-year window that you could bring in, a 5307, for the adoption with the associated opinion letter that goes with it. These are going to be volume submitters in that window that have made minor modifications and are able to come into us on a 5307 for DC adopter.
Last year changes were minor. We tried to specify the calculations we want on Form 6088 and then we changed the notice to interested party address. We actually had to correct this, at IRS Announcement 2013-13 because we had the wrong address for the Cincinnati Service Campus, instead of the Cincinnati IRS Field Office.
Okay, so that's 2013-6. Let's go to slide 8 and 9. I'm going to talk very quickly about the changes in EPCRS. Now, if you were to look at the EPCRS guidance over the years from going back to like 1989 and--into like the early or middle '90s. As regards determination phases, it said you should bring this into us. If you're coming in for EPCRS and you've got some form of qualification issue, you probably should let us review the plan and express an opinion on the plan document at the same time. While you're here for EPCRS, you might as well bring the plan in on a determination submission, we used to say.
We go into the late '90s and the 2000s. I think we had three or four iterations of EPCRS then, and it took a flavor that said, "Well, if you want to come in, you can come in but you don't have to." "There's really no need for you to bring in a case, but if you want to you can." Now again, up until this point, we didn't have a staggered determination letter system. There were these ad hoc remedial amendment periods. We didn't have the concern about whether submissions are coming in with regard to any type of a cycle. As long as you were in a remedial amendment period, bring it in. In fact, most of the ones that are coming in under EPCRS were out of the remedial amendment cycle, and so they're coming in for compliance statement.
Now, we move up to 2006 and we've got this staggered remedial amendment cycle. We have a very big concern that we take plans when they're on cycle, that you bring in the work structured according to the five-year program laid out in our guidance. What we're trying to avoid are situations where you have a plan coming through EPCRS and then essentially getting around the cycle requirements. The other issue is--I'm just going to pick a number that is not correct, but let's assume we got 2000 EPCRS submissions in a year, each of which has a determination letter case associated with it. Well, if they're randomized via EIN, then that means 80% of the submissions will be coming into us for off-cycle submitters. We have a lot of work that we wouldn't otherwise need to take.
Coming up on 2013-12, what we've said is don't come in to us for determination letter case unless you're either, A, on cycle, B, it's a termination, or C, you're dealing with a comprehensive non-amender for which IRS really needs to review the entire plan document and get it up to its compliance status before we can even go forward.
It's really not a change intended in any way to change our EPCRS requirements or change the rulings that we give out of Voluntary Compliance. It is merely to ease the amount of inbound submission work into the Determination Letter Program. Because I mentioned earlier when I gave you the numbers of our submissions, we have a significant amount of determination letter case inventory. If we don't have to take a submission in, we would prefer you to bring it into us when you're on-cycle unless you absolutely have to.
Okay, so let's move now to Notice 2012-76 and the reason we're here this afternoon. The Notice is on slide 10. It could be used for Cycle C submitters. Again, these are plans for single employers with the last digit of sponsor EIN either a 3 or 8. If you have a plan that's got multiple sponsors, and the EIN is determined by the 5500 then this is when the last digit of 5500 is the 3 or 8 It also is for governmental plan submitters. I'll talk about this later this afternoon if we have time. If you remember in the first five-year round, we gave a Cycle C to Cycle E extension for governmental plans. That extension was due to the 2007 normal retirement age regulations and to give governmental plan sponsors more time to consider what amendments were needed. We gave them a split cycle. You could come in underC or E. Parenthetically, about half went in under each.
In the second round, we've given the same extension, not because it's necessarily a new law but because we haven't finished up all of the first cycle submitters, from the initial Cycle C before the second Cycle C was opened. We said you can come back on the second extended cycle as well. I'll try to talk a little bit more about that if we have time at the end.
The primary utility of Notice 2012-76 is actually going to be several years away. It's going to be the benchmark for the second ground review of defined benefit pension plan. This means that the eventual adopters of all of our pre-approved defined benefit plans are going to be amended by the time those letters are issued and clients start adopting plans, are going to be amended up to the Cycle C cumulative list. Notice 2012-76 is going to have a lot of effects on single employee define benefit plans. All of the pre-approved plans and even many of the ones that make the modifications off of it are going to be ruled up to Notice 2012-76 compliance.
Now on slide 11 if you recall in the--I believe it was the first Cycle B Cumulative List. We put this hard date of October 1 in our guidance and we said, "From now on, you don't have to put anything into your document and we won't put it on the list unless it's issues on or before October 1, 2012." It says that I think first in the first Cycle B list on how to make an exception in the first time we issued that for--if I remember correctly--the 415 2007 final regulations. Well, we have a couple of exceptions to this rule as well with regard to Notice 2012-76. I'll cover these momentarily.
If you look at slide 12, the statutes that are going to be considered are listed on slide 12. There are actually seven different statutes and of note here, not everything in each one of these laws is going to be reviewed. Some of these laws actually have deferred affected dates, but these are the seven laws or statutes for which Notice 2012-76 resides or picks up guidance that was issued under.
Now in the first five-year round, we had a nice acronym for that period. That would EGTRRA Remedial Amendment Period. We only have one for the second five-year round because if you look at this page 12--I don't know again if I could come up with an acronym that picks up the first letter foreach of these. If you can, send it to me, I'm happy to look at it.
Now, if you go to slide 13, our general rule is the cumulative list for that year says the new law changes that are applicable. If you come in to Cycle C in an inbound submission, we're going to review it to make sure you've made all of these new law changes that I'm about to describe. Keep in mind: Those may not be the only things that you have to amend for. For example, we're reviewing plan documents frequently and looking at the definition of hours of service to see if it's properly calculated and whether it's used appropriately within the last time. Those are the things that are on our cumulative list, but if the plan is not compliant, we're going to ask you to change that.
You have to amend for things not just on the list those things that the IRS tells you. These are those due for this year. Perhaps the most significant one is that you've got a plan termination, because if you terminate, generally, that's going to cut off the extra time that you would have had under the remedial amendment period to make a change that's going to effective for the current year. Instead you're going to have to do it this year. That's actually in our Rev. Proc. 2007-44 Remedial Amendment Guidance so it's actually just back to 1988 Revenue Ruling.
Now, I said there were some inclusions and some exclusions. On slide 14, I'll start with the inclusions. These are things that are specifically included on the cumulative list even though aspects of them may allow for start after October 1st. One is the final regs under 411(d)(6). Now, this is the rule for plan sponsors to eliminate optional forms of benefit if you've got a bankrupt sponsor. Actually this is deferral so it isn't accelerating anything. The other is with regard to 436, and 436, if you look at it, it's got about three or four slides. I'll try to sum up the responsibilities for amending the 436 in one or two sentences if that's even possible.
The items that are specifically excluded on slide 15--I mean this is something that even though it's out before October 1, 2012, we won't be looking at it and the IRS won't be reviewing your plans for compliance with it. This is with regard to the 2010 final hybrid plan regs. For example, if you submit a cash balance Cycle C individually designed submission, we're not going to review it to determine whether it meets the 2010 regs other than for as it says on the screen, 411(a)(13)(A). That's the three-year vesting, full vesting at normal retirement, and that's it. Anything else is going to be deferred. I think I have a slide on this coming up a little bit later. That is excluded even though it's pre-October 1.
Okay, so now we're at slide 16 and I'm going to go over each of the cumulative list items, and I'll tell you very--some quick synopses about what the item entails and then I'll tell you whether we think you have an amendment requirement, whether you have to go to the document and address it with a change.
The first is Notice 2012-6--and before I can talk about 2012-6, I've got to go back to Revenue Ruling 2011-1. And before I can talk about Revenue Ruling 2011-1, I've got to go back to Revenue Ruling 81-100, which was the original IRS guidance on group trusts and submitting a group trust into the service for an approval letter. That guidance served a long time. In fact, I remember a couple of years ago, I was asking a colleague. "Could you send me the group trust guidance?" "81-100?" I said, "No. I mean the current one." —"Oh, that is the current one?" It is 81-100from 1981 until 2011.
If you're familiar with 2011-1, we updated the group trust guidance under 81-100. Of note, there are two parts to the update, one was to extend it to 403(b) arrangement and the second one was provide amendments that could be used depending on whether or not the trust has separate messages from the county. That's Revenue Ruling 2011-1.
Now, we'll start with 2012-6 which gives you an extended transition period, meaning the changes of 2011-1. Basically, 2012-6 says you've got extra time to put in these model amendments or to change the plan in the conformity to 2011-1 until such time as the IRS issues future guidance. It also just, by the waymade two other changes. One was to give the rule for spin-offs involving citizens of Puerto Rico that are in a dual purpose plan. They give an extension of that time until next--the fifth year that we're in now. For governmental plans affected by the spin-off until the first regular meeting day of the legislature with authority to make an amendment to plan beginning this year but no later than 2015.
As it applies to your individually designed plan submission, we don't think there's any employer amendment required here, but the group trust is going to have to be amended according to Revenue Ruling 2011-1 by the time of the deadlines that I've just described. There wouldn't be a change at the employer's submission level. This would be changed at the group trust level.
Let's jump to slide 18 and talk about the Governmental Plan Normal Retirement Age Guidance and Notice 2012-29. That notice says--I'm going to summarize it very briefly. It says that a governmental plan that does not have in-service distribution language is going to be deemed to meet the 2007 final regs until such time as the Treasury issues amending future guidance.
Now, in general, the 2007 regs if you recall and this is the reason why we gave the extension. I've mentioned earlier from Cycle C to E. It said that plans have to have a normal retirement age that's reasonable based on many different factors including the demographics of the workforce but no later than age 62, no less than age 55. That notice caused some concern especially in the governmental plan segment where it's routine to have retirement ages that are entirely service-based. Notice 2012-29 —says absent in-service distribution provisions, the plan will be deemed to meet the 2007 final regs. Parenthetically, and this is a little bit beyond the scope here, it also modified that rule that was previously in place for qualified public safety employees. If you recall, they could have a normal retirement age as low as age 50 as long as they were in a plan that covered only qualified public safety employees. This notice now says while they could theoretically be in the single plan with other non-safety employees who are going to stay as bifurcated normal retirement age.
As it applies to your plan, we don't see that there's any language requirement. In fact, the rule under Notice 2012-29 delays what would have been the language requirement this year until--as you see on slide 18 -- untiloff in the future until we get guidance in place to address them. There wouldn't be a change now. The other part of this that might be affected now is, theoretically, if you submitted a Cycle C case within age 50, normal retirement age, as long as that was a part of a plan where some of the employees were subject to the age 50 as a safety employee and some were not--theoretically, we could rule on it this year. Otherwise, we would have had to ask you to make a modification.
Okay, let's go to slide 20 which is the defined benefit rollover under IRS Revenue Ruling 2012-4. Now, 2012-4 describes the treatment of a defined benefit plan that accepts a rollover from a DC plan. We're talking about a receiving defined benefit that takes in a rollover from a sending defined contribution. 2012-4 says what happens depends on which of three conditions you meet. If you have a defined benefit plan that accepts the rollover from the DC plan and takes that rollover proceeds and annuitizes them, using the normalizing that the plan provides for 417 purposes. This would be an applicable interest and applicable mortality table required by Section 417.
If you normalize the benefit that way, you're good. That's fine and the plan is compliant. If you normalize it using less favorable equivalency, you use mortality and interest lower than 417, that wouldn't be acceptable. In fact, we would say you're out of your--you're essentially divesting a benefit. Otherwise, it accrued to the benefit of the employee. If you normalize it using more favorable equalization, you equalize the benefit with an interest and mortality assumption more favorable to the participant, that's acceptable. That excess amount has to be tested as if it's an additional annual benefit provided to the employee under 415(b).
You have three scenarios. If you take it and annuitize it using 417 interest and mortality, you don't have to do anything. If you cut it back, you've got a problem. If you essentially enhance it, that extra amount, the amount by which you provide an annuity more valuable than what would be an annuity under 417, it's essentially an extra benefit testable under 415.
Now, for plan language changes--by the way, this is effective for rollovers right now this year. For plan language changes, you wouldn't have to do any unless a couple of things occur. One is if you have a plan that wants to accept rollovers and you intend to take one, you have to amend it first to accept rollovers. The second is if you were going to accept the rollover, I suggest you look at the document to make sure that you're converting it using a reference, probably a cross reference, to the plan's applicable interest and mortality up in the front definition section of the document, that's 417 compliant. If it's not, then you're going to have to add something in 415 in the 415 language of the plan that says something like for any amount of the rollover normalized using the plan's interest and mortality--let's say that those are not 417 rates. That extra amount will be considered an extra benefit pursuant to "Article 6.5" or whatever the plan's accrued benefit section is. You're going to have to put this in the 415 section of the document. You're going to have to enable the plan if you take in a rollover that's normalized out of the 417 rates. You're going to have to put in the 415 section of the document, something that captures it as a testable annual benefit under 415(b). If you don't accept rollovers, then nobody is doing it.
Let's go to slide 21 which is the hybrid plan regs and the guidance that we gave out in Notice 2012-61. This is guidance under MAP-21, actually. If you look at 2012-61, it has an extensive set of questions and answers relative to the MAP-21 segment rates. As they apply to plan documents here, we're talking about hybrid plan documents. 2012-61 essentially says, "Well, some parts of the 2010 hybrid regs won't apply until 2014." Okay, this is one thing I mentioned as an exception or even though it precedes October 1, the requirements are deferred.
Briefly, I'll go back a little bit further. In Notice 2011-85, we indicated that Treasury is going to amend these regulations to address the issue about market rates of return for hybrid plans like cash balances or pension equities. Whether any of these MAP-21 segment rates are going to be specified in future regs as an interest crediting rate that's "not in excess of market." That's the principal concern. That's not yet been determined. The impact of this 2010 regs is deferred at least until 2014 by which time we expect to have other guidance.
As it applies to your plan document, we would say that you don't have a language requirement at this time until final regs are set. I would predict it would be likely that there will be document changes that actually depend on what comes out, that this will necessitate document change after the guidance comes out. I assume the amended guidance which would be an amended reg will then go out on a future cumulative list, and somebody--perhaps not myself--will be talking about it at that time in the future. For right now, we don't have a language requirement by 2012-61.
Let's go to slide 22 and that's the 411(d)(6) final regs, which provide that a bankrupt single employer to find benefit plan can amend to eliminate its lump sums or other optional forms of benefit while in bankruptcy proceeding as long as four conditions are met. The four conditions are--I'm thinking. It's on the top of my head. Number one, you have an AFTAP certified by the actuary that's under 100%. Number two, that you're restricted from benefits under 436(d) because of your bankruptcy. Number three is that the bankruptcy court orders you or grants permission to amend out the optional forms. I forgot, number four was, that's what you get for doing--oh that the PBGC determines that you--this amendment is necessary to avoid distress termination. We have four requirements there. AFTAP under 100%, bankruptcy court permission, restricted under 436(d), and PBGC okay because your AFTAP is on--because you would otherwise be in a distressed situation. You meet those four requirements then a plan can eliminate all optional forms of benefit including the lump sums.
As it applies to Cycle C, you don't have an amendment requirement per se, but if you have a bankrupt single employer defined benefit plan, you're going to have to meet these conditions, and I should have said moments ago that this applies for amendments for eliminations that are after November 8, 2012.
Let's say you come into us with a Cycle C determination letter and you've got in the plan distribution section, 5.1(a), lump sums and 10-year installment payments, then you just got the sentence after that. However, Section 5.1(a) distributions will no longer be permitted after this year or something like that. That would be an example of a plan that is hopefully permissibly eliminating its optional form, and if you're going to do that, I suggest in your cover letter with your determination letter submission you identify that you've got these four conditions met.
"Dear Internal Revenue Service. Here is a determination letter submission. We specifically note and refer you to Section 5.1. We've eliminated the 10-year installment payment options. Enclosed with this submission is a copy of the AFTAP certification, copy of bankruptcy court order, a copy of the certficatoin of restricted status". You send us all the information to indicate that you've got the ability to do this because we're going to review for this and then eventually have to contact you to go get it. I would suggest if you've got this situation and you're permissibly able to do it, bring us any information upfront so that we don't have to come ask you for it.
Okay, let's go to slide 23 which is the defined benefit joint and survivor provisions. The guidance is Revenue Ruling 2012-3. Now, the Revenue Ruling clarifies the situation in which a DC plan has to provide J&S. Now, ordinarily and just as a brief introduction, DC plan defined contributions generally don't have to provide joint and survivorship language unless you meet one of the following conditions. One is you're a money purchase pension--I hope I could name these off the top of my head. Money purchase or target benefit. If it offers as a single annuity; if the plan permits--I'm going to get this wrong, probably. Plan provides on the death all the benefits go to the surviving spouse. The fourth one, one is the subject of this guidance, is that the plan, the receiving plan, is not expecting a transfer from another plan that was subject to 412 or 430. You're not taking over money that was previously subject to minimum funding which would have then been subject to joint and survivorship or any sourcing plan.
By the way, if you want to see more description on this. I just have this actually right next to me which is why--I'm thumbing through this very quickly unless you get the four. The IRS has guidance on this in our Alert Guideline No. 3 which is IRS publication 6391. We have an explanation about transferred benefits when you have to annuitize and then a description of all the requirements our reviewers are going to look at to determine whether the plan properly has during survivorship language. It's work guideline explanation of the three documents, 6391.
Rev. Rul. 2012-3 provides guidance under the fourth one which is explaining what happens if you accept a transfer from a sourcing plan that gives over annuity contracts when the receiving plan, the defined contribution, accepts a transfer of an annuity contract from another plan whether that transfer triggers a joint and survivorship requirement here. That's what it covered in Rev. Rul. 2012-3.
Now, let's talk about the plan document. Is language required? Well, language is--it depends really on what the current plan says. If you've got a plan that doesn't accept transfers at all, then you wouldn't need any additional language. If you have a plan that does not accept transfers from any plans of just the minimum funding, you wouldn't need any language. I would just caution to watch. We find quite a number--in my career, I've seen a number of situations where plan B accepted a transfer from a knowingly participant that was bringing over my purchase proceeds, and it wasn't a rollover with a trustee transfer. Then you have a problem because you've got a document set up without joint and survivorship but you've got to give that election as soon as you take it in. You got to give the annuity rights as soon as you bring it in.
You wouldn't have any language unless the plan permitted a transfer from a plan that was subject to 412. If you do, you're going to have to provide that you, under circumstances of the revenue ruling that you provide a J&S benefit.
Okay, I could speed it up because we're within the 10-minute window here. Slide 24, MAP-21 guidance. This permits defined benefit plans with excess assets to transfer them to fund post-retiree medical benefits beginning in January of 2012. It would have ended in December this year, but it was legislatively extended until December 31 of 2021. There's no language requirement to do this. There's no language required per se unless you have a plan that wants to do it, as if you want to be able to make such a transfer, the plan will have to provide this language before you actually do it.
Okay, so I did give myself enough time to take questions and I'd cover 436 which have a couple of wrinkles to it.
436, if you recall, was added into the law of a PPA. PPA moved out most of what was in 412 back into IRC 430. For those of you that work with plan documents, probably the biggest significance at least as the plan document is concerned is that it brought in all of the minimum funding requirements into the plan and made them a qualification requirement under 401(a) which was never the case.
436 provides a series of restrictions on the payment of benefits and preventions against amending the plan to increase benefits, etc. That was the statute itself. The Treasury came in with implementing regs in October of 2009 that were effective in October of 2010. Now, the IRS has issued administrative conservative guidance the 436 in three different places. One is IRS Notice 2011-3 which provided the series of questions and answers regarding the implementation of 436, generally. We came up with Notice 2011-96 which gave a model amendment to be adopted for 436 purposes and then we came out with Notice 2012-70 which extended the deadline for adopting the 2011-96 amendment. The last two pieces, Notice 2011-96, the amendment, and 2012-70, the extension, are what's on the Cycle C cumulative list. Read collectively, they say the following with regards to 4356. Number one, if you come in to IRS this year, Cycle C or beyond for determination letter, you're going to be reviewed for 436 compliance. You got to have the 436 language in the document. Number two, if you're not a Cycle C plan, then you have to do a Cycle C interim amendment. The deadline for the Cycle C interim amendment is generally the later of the plans 2013 plan year or the due date of the sponsor's income tax return coinciding with the 2006 year.
Now, just two brief words on 436. One, with regards to the model amendment. We put out model amendments on quite a number of subjects. In fact, something in Slide 29, you'll see a list of all the things we put, model amendments out on as they apply to Cycle C submissions. We've got one for [inaudible 0:51:00], the R&D 2009 suspension, the group trust that I mentioned earlier, and then the 436 model in 2011-96.
Generally, you don't have to adopt IRS model amendments, but you got to get close to what they provide. We think that the model amendments express the law in its highest and best form. If you're going to do something else, we want to provide the same thing as the law provides here okay. Just there's one wrinkle here and that's with regard to 411(b)(6). You get 411(b)(6) protection as long as you do the amendment timely and as long as you limit the cutback only to the extent necessary to meet 436. If you use a model amendment, you're going to have an appropriate amendment for this purpose. If you do your own, you're going to have to figure how much can you cut back and be only cutting to what the statute requires.
That's the first caveat. The second one is with regard to restating the document and I guess I'm not going full circle back to where we started. For 436 purposes, the required amendment must be in the restatement. You can't ride a sidecar in the application. Now, generally as I said earlier, the restatement is designed to aid the IRS' readability. You have to synthesize all these loose amendments and get them into a single unitary document in order for us to express an opinion on the plan.
If you have something running sidecar or right beside it, or just a small one, okay. Well, maybe we'll take one. If there's one out there hanging outside, maybe if it's not too much and it doesn't require a lot of integrations, one in two pages, if there's change of the trustee, or something, I will probably take it and not make it a problem. With regard to 436, specifically, you can't do this. This change has to be into the statement document. This is in Section 3 of Notice 2012-70 in the second to the last paragraph. That change has to go into the plan.
Okay, as I mentioned, slide 29, we issued some sample language. I don't have time to cover future possible changes other than to say we have a 403(b) program at some point down the road. I think we've been saying we'll try to get it out in the summer. We'll eventually come out with probably an update to Rev. Proc. 2007-44. The good news is we haven't gone to it and they changes to it recently, but the flip side is that procedural guidance like this tends to get updated every X number of years and that work in the sixth year eventually at some point. Maybe around the time we come up with the decision on the interim amendments, we'll come up with changes to 2007-44. Maybe if we have other things we need to come out with, we'll do them earlier. There are names to be seen.
I do think down the road we'll have a pre-approved cash balance and ESOP pre-approved program, I think this really is necessary for us to explore these at this time to try to see if we can use these as a way to conserve our resources.
Now, I'm going to go into questions and answers and I just want to make one last comment on the two webpages that are at the end of my presentation. I put them in there for a reason. One is we've been asked to put content on our webpage that describes what amendments do I have to do every year. We put out a product. If you look on the second to the last page, we have a bullet update of plan, and if you click that it tells you what different general things apply. We've been asked to go further so do you--we come up with a product that says do this, do that, and do this for this plan for this year. It's not that we're reluctant to do it, but it's somewhat difficult to do that because every plan has different features that it depends. I mean look at what I was talking about with regard to transferees. Well, it depends. If you have your transfers, okay, are they restricted from a 412 plan? Okay, well then how to make an amend--it's very difficult to tell you. These are the situations under which a given plan has to be amended across the board.
I guess to sum up, we have an evaluation with this section and we might be--in addition to your comments about the section, be interested if you think this is helpful to rather than put up another piece of guidance or another forum, or another tub on our website. When you thought that was helpful, tell somebody that goes through list and tell you here, you have to amendments for it. If we're not going to do that, if you think this is an inappropriate substitute.
All right, so I've got five minutes to whip out about five or six questions. Let me go as quick as I can. First question should be--I'm just going to take what I've got. Should the provisions of each year's cumulative list be used as the basis for preparing annual good faith amendments for individually designed plans in the next just succeeding cycles? The answer is yes. Generally, the list sets the interim amendment requirements for that year. If you're on cycle, all these changes should be folded into the restatement document. If you're off cycle, you're going to add them to the interim amendment you're going to do..
Second question. Please address the restated document execution prior to the submission. If execution is not required, what language is used to be included in a cover letter to indicate that the restated plan is not yet executed but constitutes the binding legal document? You don't need to put any additional language in there. You can call our attention to it. Again, as long you're in timely, you come in as a Cycle C submitter on January 30, 2014 and you bring in to us a restatement which is, again, all we're going take and we're going to look at the last page and see it's not defined, we're going to understand it's a proposed restatement and we're going to--as long as you execute it after we're finished with the letter. You're not going to do anything else to draw our attention to it.
Next question deals with 436 and what I said moments ago about "can I have the 436 provisions outside the plan document" and asks basically--I'll give the facts, give a new cash balance plan. It was started in 2012 signed by the last day of 2012. It doesn't have 436 provisions in it. The next year, the employer adopted a sidecar 436 amendment. We're in Cycle C. We're going to come in by December 31st. Can we leave it outside the plan? Do we have to go and restate it into the plan? If not, will we reconsider our position? Well, we probably won't reconsider now because it's only two months old, but we certainly--if you have comments like this, send them in. We're always evaluating our program and if the things we're doing don't work. Again, as I noted before, we have specific guidance that says as it pertains to 436. That one cannot be outside the restatement and the reason is because we really need to evaluate how this provision and the different restrictions you put on distributable benefits. Work in connection with everything else. We can't read it across two plan documents. It's got to all be in one. That was really intended to aid IRS' readability but also to ensure that you've met out the restrictions appropriately.
Today, I discussed the rationale behind the IRS, eliminating the working copy of plans. Well, it was limited--not limited. It was based on the idea that we don't want to have situations where we are approving a document and then knowingly approved a conflict in another document that this other document is supposed to represent. We'd want to express an opinion on the plan and on the plan instrument that is used to administer benefit. That's what we want to review and rule on in our process so that we recently took the working copy out.
I have two questions dealing with the status of approval letters. One says I came into IRS on May of 2011 and I have not yet heard anything. Another says that we've come in with the first cycle and we didn't get the letter. We came in for submission of first cycle. We didn't get the first cycle letter. Should we come in on the second cycle? To the first questioner, I'm going to send you an e-mail. I want you to send to me a copy of the number of the plan's case number, not the name of the employer or EIN, or plan name, just the case number and I'll get in touch with you because that type of a situation got plans falling through the cracks is not something we want to have. You give me the information and I'll see what the story is.
For the plans that do have a first cycle ruling that we didn't get to yet, generally, that is the result of guidance holds or where we've got issues such as I described with governmental plans. You definitely need to make a second cycle filing to preserve your second remedial amendment period. Again, I want you to send me the case number so I can look this up and get back to you as to where it's going.
Okay, and with that, I think I am almost out of time. On behalf of John, myself, and all of us in the IRS' Customer Education and Outreach, we want to thank you for attending today's forum. We try to make an effort to provide products that we think are useful to you, especially as they assist you in complying with the law. The process for amending plans is very difficult and can sometimes be complicated. We would be especially interested if you think this is helpful to you in understanding what your responsibilities were for this year. On behalf of all us, I want to thank you for attending today's session.
Eddie: Thank you John and thank you to all of our participants for joining today's teleconference. This concludes the teleconference and you may now disconnect.