Interim Amendments for Tax Qualified Plans -- A Mixed Bag
Beginning in the late 1990s, the IRS Employee Plans group spent a great deal of time studying various options for avoiding the enormous workload spikes that arose during the determination letter process in the past and developing the settled upon option -- the staggered remedial amendment period (RAP). As part of this process, IRS EP personnel made a real effort to "partner" with the various stakeholders in the benefits community (ranging from benefits practitioners to prototype sponsors and vendors) to develop a workable, manageable program for all. One of the items that most stakeholders generally opposed during this process was a requirement for annual amendments documenting new law or regulatory changes--which have come to be commonly referred to as "interim" amendments. There was considerable concern about the time/expense that would be required to manage this process in an effective manner (particularly for prototype vendors), as well as the potential confusion and resulting "foot faults" this would likely engender. Instead, it was recommended that these amendments generally be required at the time the plan otherwise had to be submitted for IRS approval. It appeared that IRS officials understood these concerns as discussions concerning interim amendments disappeared from the staggered RAP dialogue--or so we thought. To the surprise of many, the final staggered RAP revenue procedure (originally Rev. Proc. 2005-66; now Rev. Proc. 2007-44) contained specific requirements on interim amendments for all tax qualified plans (including prototypes and the like), the primary motivation being that the plan document must be kept up-to-date throughout the cycle.
In a nutshell, the timing turns on whether the amendment is a "discretionary" one or involves a "disqualifying provision." If it is a discretionary change, the amendment must be adopted by the close of the plan year in which the change is first implemented. On the other hand, if a disqualifying provision is involved, it does not have to be adopted until the later of--
the due date (including extensions) for filing the employer's tax return for the year in which the applicable RAP began, or
the last day of the plan year in which the RAP began.
So, how do you tell between a discretionary amendment and one which involves a disqualifying provision? In general, a "disqualifying provision" is one which either--
results in a failure to comply because of a change in the qualification rules, or
is integral to a requirement that has been changed (which otherwise would result in a compliance failure).
A discretionary amendment covers everything else. While it is often easy to tell what is a discretionary change versus a disqualifying provision, the lines become blurred when there is new law or regulatory change with optional provisions--and where these fall is not always clear.
The guidance concerning the timing for discretionary amendments has, in some respects, provided some welcome clarity, as we now know that plan sponsors generally have until plan year-end to adopt discretionary changes (for example, a new contribution formula or distribution option). However, I fear that the interim amendment requirements have otherwise given rise to the very problems the benefits community was concerned would happen with interim amendments. To its credit, the IRS has taken some steps to alleviate this. In addition to issuing some clarifying guidance on amendment timing for certain new law changes, it has set up a web page which contains a listing of the 2007 interim amendments (http://www.irs.gov/retirement/article/0,,id=173372,00.html)--although it would be more helpful if an updated list was issued annually much like the agency now does with the list of cumulative changes for each staggered RAP cycle. The IRS has also set up a relatively streamlined and inexpensive application process for certain missed interim amendments under the Employee Plans Compliance Resolution System (Rev. Proc. 2006-27, Appendix F)--which the agency is apparently planning on significantly expanding soon. But are these enough or does the complexity/confusion that the interim amendment requirements have caused outstrip their value? I, for one, am finding that the latter may be true.