DTL Process comment logo and signature
9 Pages
English
Downloading requires you to have access to the YouScribe library
Learn all about the services we offer

DTL Process comment logo and signature

-

Downloading requires you to have access to the YouScribe library
Learn all about the services we offer
9 Pages
English

Description

September 29, 2003 CC:PA:RU (Announcement 2003-32) Courier’s Desk Internal Revenue Service 1111 Constitution Avenue NW Washington, DC Re: Announcement 2003-32 – Comments on Determination Letter Process Dear Sir or Madam: On behalf of the American Benefits Council, I am writing in response to the request for comments with respect to Announcement 2003-32 and the paper entitled “The Future of the Employee Plans Determination Letter Program” (the “White Paper”), which was issued by the Internal Revenue Service (the “Service”). This letter is the more detailed comment letter referred to in our letter dated September 2, 2003. The Council is a public policy organization representing principally Fortune 500 companies and other organizations that assist companies of all sizes in providing retirement, health, and other benefits to employees. Collectively, the Council’s members either sponsor directly or provide services to retirement and health plans that cover more than 100 million Americans. The Council commends the Service’s review of the existing determination letter process and the inclusion of various stakeholders in the deliberation. Announcement 2003-32 illustrates the critical role that the determination letter process plays in our voluntary, employment-based retirement system: “Determination letters provide assurance to plan sponsors, participants and other interested parties that the terms of employer-sponsored ...

Subjects

Informations

Published by
Reads 15
Language English

Exrait

September 29, 2003
CC:PA:RU (Announcement 2003-32)
Courier’s Desk
Internal Revenue Service
1111 Constitution Avenue NW
Washington, DC
Re:
Announcement 2003-32 – Comments on Determination Letter Process
Dear Sir or Madam:
On behalf of the American Benefits Council, I am writing in response to the request for
comments with respect to Announcement 2003-32 and the paper entitled “The Future of
the Employee Plans Determination Letter Program” (the “White Paper”), which was
issued by the Internal Revenue Service (the “Service”).
This letter is the more detailed
comment letter referred to in our letter dated September 2, 2003.
The Council is a public policy organization representing principally Fortune 500
companies and other organizations that assist companies of all sizes in providing
retirement, health, and other benefits to employees.
Collectively, the Council’s
members either sponsor directly or provide services to retirement and health plans that
cover more than 100 million Americans.
The Council commends the Service’s review of the existing determination letter process
and the inclusion of various stakeholders in the deliberation.
Announcement 2003-32
illustrates the critical role that the determination letter process plays in our voluntary,
employment-based retirement system: “Determination letters provide assurance to plan
sponsors, participants and other interested parties that the terms of employer-
sponsored retirement plans satisfy the qualification requirements of the [Internal
Revenue] Code.”
As indicated in our September 2 letter, we believe that the importance
of this function cannot be overstated and that any possible changes to the current
regime require significant further study and deliberative consultation with affected
stakeholders.
CC:PA:RU (Announcement 2003-32)
Internal Revenue Service
September 30, 2003
Page 2
Announcement 2003-32 was issued subsequent to Announcement 2001-83 which
invited comments on ten different alternatives to the current determination letter
program.
In response to comments regarding Announcement 2001-83, Announcement
2003-32 eliminated eight of the ten alternative options, and added a third.
The options
currently under consideration include (1) maintaining the status quo, (2) implementing
a five-year staggered Remedial Amendment Period (“RAP”), or (3) requiring annual
plan updates (which could be adopted in connection with either (1) or (2)).
Maintaining the Status Quo
The Council believes that the best option at this time is to maintain the status quo.
Council members have provided consistent feedback that the current determination
letter process works well and should be maintained.
In particular, the status quo is
flexible, in that remedial amendment periods in response to changes in law are set
based upon each given set of circumstances.
The Council also believes that the modifications to the process contained in
Announcement 2001-77 significantly improved the determination letter process.
We
advocate that the Service allow more time for the modifications in that announcement
to be reflected in the process before determining whether further changes are needed.
As always, the Council is willing to work to carefully develop improvements that
achieve consensus.
More detailed comments on the other two options proposed in the Service’s White
Paper are provided below.
Five-Year Staggered RAP
Under this option, staggered RAP cycles would be introduced beginning with the
EGTRRA RAP for continuing plans.
Existing rules would continue to apply for new
and terminating plans.
The staggered RAP would permit the adoption of retroactive
remedial amendments resulting from legislative and guidance changes and plan
amendment within the 5-year period ending on the last day (December 31) of the RAP.
This means that the employer-sponsor would not need to request a determination letter
more frequently than every five years.
The five year period is based on the last digit in
the plan sponsor’s taxpayer identification number (“TIN”).
Each determination letter
would be required to specify its expiration date.
Although there may be workable ways to structure a staggered RAP for individually
designed plans, Council members have expressed concerns that a staggered RAP, with
CC:PA:RU (Announcement 2003-32)
Internal Revenue Service
September 30, 2003
Page 3
or without required annual amendments, would have very significant negative effects
on sponsors of master and prototype (M&P) plans. As you know, M&P plans play a
critical role in facilitating retirement coverage for participants and compliance among
plan sponsors, particularly small plan sponsors.
Application to M&P Plans – The General Rule.
Under the general rule, sponsors of
M&P plans would be required to update their plans and have them re-approved every
year.
An employer with a RAP in a particular year could update “using the approved
M&P document . . . that was last approved prior to the calendar year in which the
employer’s RAP ends.”
The Service explained that this approach was taken to
accommodate employers with different cycles.
Council members believe that the changes discussed in the White Paper would create
significant administrative difficulties for M&P sponsors, unless all plans operating in
the M&P environment are given a uniform, workable rule. Behind many M&P plans is a
comprehensive recordkeeping and administrative services system that is the keystone
that facilitates these small employers’ ability to maintain and administer retirement
plans that are compliant with the requirements of the Internal Revenue Code and
ERISA.
These systems, which keep plan records, generate forms, and prepare SPDs
(among other functions) are directly linked to the terms of the plan.
Changes in the
plan document necessitate changes throughout the system, often at the cost of
significant expenditure of human and financial resources.
Even though the Service’s proposed system of staggered RAPs for individual employers
might look simple, it would turn the M&P world on its head unless M&P sponsors –
and all plans operating in the M&P environment – are given a uniform rule.
To do
otherwise would be disastrous for ensuring participant protection and administrative
compliance.
In the experience of our members who provide M&P services, employers
have a challenging enough time administering qualified plans.
The entire point of the
M&P program – and its great appeal – is that these plans are simple and uniform.
If the
Service makes it impossible to keep these plans simple, it will be very difficult for
employers to keep them in compliance, which will inevitably jeopardize participant
benefits and retirement plan coverage.
The rapidly growing complexity of plan administration and maintaining tax-qualified
plans may be contributing to the ever-hastening exit from the recordkeeping business
by many financial institutions.
Imposition of a costly new regime on prototype plan
sponsors will only serve to accelerate this exodus.
To the extent that recordkeepers
remain, it is likely that increased costs will ultimately have to be borne by plan sponsors
or participants.
CC:PA:RU (Announcement 2003-32)
Internal Revenue Service
September 30, 2003
Page 4
The annual filing option presents significant problems for M&P sponsors.
Annual
filings mean that adopting employers will be inundated with new notices or documents
potentially every year.
As most prototype sponsors will attest, small employers that are
willing to maintain retirement plans do so on the premise that plan administration and
maintenance will not distract the business owner unduly from his or her main focus,
i.e., managing the business in a difficult economic environment.
To the extent that
additional time and resources must be spent on plan documents, plan sponsors will be
all the more likely to abandon retirement plan sponsorship altogether.
Adding options (as a result of changes in the law or the M&P plan sponsor’s desire to
add discretionary options) also would present a significant challenge under the
staggered RAP.
Usually a M&P plan sponsor wants to make those changes or
additional options available to all users of a prototype.
Under staggered RAP, it
appears that a M&P sponsor would have to draft up to five different separate
amendment/adoption agreements for plan sponsors.
Also at issue is the significant amount of resources that M&P sponsors often expend to
make diligent efforts to get their clients to execute restatements.
Particularly in the
small plan market, it can take a tremendous amount of resources on the part of the
M&P sponsor to get employers to respond to requests that they sign documents.
Constant updates and requests for signatures could make employers even less receptive
to signature requirements.
This would not facilitate the goal of keeping employers in
compliant plan documents.
Moreover, when one considers the fact that the employer would have a five-year RAP
within which to adopt a proper M&P document, this approach could lead to further
mass confusion.
For example, during a five-year RAP, a single employer could be
presented with multiple different M&P documents from the sponsor and have to adopt
one of those retroactively to the beginning of its 5-year RAP.
Rather than a positive
impact on compliance, this would most likely have just the opposite effect, as
employers struggle to understand their constantly changing plan documents.
It also should be noted that M&P sponsor administrative systems must be changed
every time the document is fundamentally changed.
For example, SPDs and other
forms may all systemically be linked to certain options in the adoption agreement. If the
adoption agreement is amended every year, then potentially the computer system
generating SPDs must also be amended every year.
Even worse, if multiple documents
could be outstanding, that means that the sponsor would need to maintain multiple
different document generating systems.
This could require M&P sponsors to invest
significant amounts of resources (both financial and personnel) to build out their
CC:PA:RU (Announcement 2003-32)
Internal Revenue Service
September 30, 2003
Page 5
systems to accommodate this setup.
Once built, it would require significant additional
resources to regularly update the systems.
Another issue that must be considered is
whether a new filing would be required if there were not changes in a particular year.
We assume that, because determination letters would now have an “expiration date,”
annual update filings would be required even if there were no changes in order to
update the expiration date.
Another administrative burden imposed under the regime would be that different plan
structures would have to be maintained for different employers.
The facts in Example 1
of the Special Circumstances section illustrate this problem as follows:
Employers A and B are adopters of volume submitter plan P.
The RAP for
A’s plan is 2005, 2010, etc.
The RAP for B’s Plan is 2006, 2011, etc.
Guidance was issued that was effective for plan years beginning in 2009.
The plan timely is amended and an advisory letter is requested and
received in December 2010.
Employer A could adopt the plan document
that was approved
prior to
2010
or
the document approved
in
2010, if
available (which is highly unlikely from a business aspect if the advisory
letter was received in December 2010).
Employer A would not need to
adopt the 2009 updates until the 2015 RAP end date.
Nevertheless, the
amendments ultimately would be retroactive to 2009 and the plan would
need to operate in accordance with these provisions.
On the other hand,
Employer B would be required to adopt the 2009 updated plan document
by December 31, 2011.
This means that two different versions of the same
M&P plan would be adopted and in effect at the same time even though
in operation they would both need to comply with the same rules.
Furthermore, if any elections were required in an adoption agreement,
even if Employer A does not technically adopt and amend its plan,
Employer A necessarily would need to make these choices prior to 2015 so
that the plan could be operated in accordance with the new guidance.
Alternatively, if the plan does not need to be operated in accordance with
the guidance until the end of Employer A’s RAP (which simply depends
on whether the particular legally-related change is mandatory or
voluntary) the M&P plan sponsor would be forced to operate two
different documents in at least two different ways until all employers
adopted the 2009 amendments, which could be as long as 5 years from the
date of the M&P opinion letter.
This example does not even contemplate the administrative issues that would result if
in each subsequent year new laws or guidance required the M&P plan to be amended,
CC:PA:RU (Announcement 2003-32)
Internal Revenue Service
September 30, 2003
Page 6
yet employers with different RAPs would not be required to adopt such changes until
the end of each individual employer’s RAP.
The Council is very concerned about employer confusion with any version of a
staggered RAP.
Presently, the M&P plan sponsors can generally communicate to
prototype users a uniform deadline (e.g., September 30, 2003).
Even with one date for
all, M&P plan sponsors have a very hard time getting some plan sponsors (especially
small employers) to pay attention.
It helps when the Service and other entities also
communicate this date.
Under staggered RAP, the deadlines would be much harder to
communicate and harder for employers to understand.
The proposal also indicates that determination letters would have an expiration date.
While not clearly indicated, we assume that opinion letters would as well.
We are
concerned that this might cause undue alarm for employers and auditors if the M&P
letter on which they are relying has an expiration date of one year (and, we assume if
the M&P is required to be resubmitted, it would).
While these individuals could be
educated over time, even under a best-case scenario some employers may be very upset
if their M&P sponsor does not have its “new” letter by the time its “old” letter expires
(which could very well happen if the M&P sponsor is negotiating over provisions with
the Service).
With the challenging business climate in the M&P world, we can imagine
situations where sales teams use their letter as a sales tool if competitors do not have
them yet.
In the past, we understand that the Service has tried to curtail this practice,
but if the periods are annual and rolling, it may be difficult for the Service to do this.
Application to M&P Plans – The Alternative Rule.
The White Paper also discusses an
alternative rule with respect to the five-year staggered RAP option for M&P plans.
Under the alternative rule, M&P plans would be required to be amended on a five year
cycle based on the M&P sponsor’s TIN.
The M&P plan sponsor’s RAP cycle becomes
that of any adopting employer, and the adopting employer must adopt the amended
plan within one year of the of the M&P’s approval.
This approach, in essence, takes care of many of the cost and administrative burdens
discussed above.
This approach has a much better chance of success and, with some
adjustments, could be a viable alternative to the status quo, if the Service concludes that
the status quo is not acceptable.
This proposal also raises some significant issues for M&P plan sponsors, however.
Some believe that sponsors that would be “early” in the staggered schedule would be at
a competitive advantage over those late in the schedule.
Employers may want the
“latest” document.
Some of our member company M&P plan sponsors have received
CC:PA:RU (Announcement 2003-32)
Internal Revenue Service
September 30, 2003
Page 7
calls from adopting employers raising concerns that other companies have received
their GUST document and inquiring why theirs have not arrived.
It might be possible
to address this issue with a uniform RAP applicable to all M&P plan sponsors but that
negates many of the benefits of the staggered approach.
There also is a technical flaw with the alternative rule.
Under the alternative rule, the
employer’s RAP becomes that of the M&P provider, even if this means that the RAP for
the employer is extended from when it had an individually-designed plan.
Conversely,
if an employer switches out of M&P to an individually-designed plan, the employer’s
RAP applies, even if that lengthens the RAP.
The technical flaw is that nothing appears
to prevent an employer from alternating between M&P and individually-designed
status to continually extend the RAP.
However, we believe it is very unlikely that
employers would go through the burdens of moving between M&P and individually
designed plans (e.g. recordkeeping blackouts and associated notices, new contracts,
plan documents, selection of new investments, etc.) simply to extend their RAP.
Aside from these issues, a five-year cycle based on the M&P sponsor’s TIN could work
with some modifications, as follows:
(1)
Our members feel strongly that the Service should not implement required
annual amendments for the reasons outlined above.
However, if the Service decides
that it must issue annual (or otherwise periodic) amendment packages, it would be
helpful if M&P sponsors could implement these amendments pre-approved by the
Service with all optional provisions (or with flexibility for M&P sponsor options to be
made available based on the legal options available).
These could be adopted by the
M&P sponsor and sent to adopting employers (with any optional provisions, as needed,
depending on the law change).
Most important, however, M&P plan sponsors and their
clients would want assurance that these interim amendments would not throw a plan
off the M&P system as long as the amendments were done in good faith;
(2)
It also would be helpful if the Service allowed – but did not require – M&P
sponsors to create “interim restatement” documents (incorporating annual amendment
addenda into the body of the plan).
Any such interim restatement created during the
five-year cycle and prior to official approval could be relied upon as a good prototype
document (subject to the good faith amendment rule) for all legally-related
amendments (not design choices unrelated to changes in law or regulation).
If the
Service requires any additional amendments to these legally-required provisions, the
amendments could then be passed through to any employers who adopt the interim
restatement document prior to official approval without any further action on their
CC:PA:RU (Announcement 2003-32)
Internal Revenue Service
September 30, 2003
Page 8
part.
(The only adoption should be for any newly-found options that had not been
previously selected.)
In addition, an M&P sponsor could have the employer’s initial
adoption by its terms apply to any Service-required amendments that are approved by
the M&P sponsor.
That way, the M&P sponsor is not required to have employers re-
adopt if the sponsor does not want to do so.
Annual Plan Updates
Under this proposal, before the beginning of each calendar year (or in the beginning of
each calendar year), the Service would publish a list of law and guidance changes that
require plan amendments that are effective for plan years beginning or ending in that
calendar year.
In addition, the Service would endeavor to publish model or sample
amendments.
Under this scenario, similar to the first proposal, M&P plan sponsors
would be required to submit applications for new opinion letters for plan amendments
required to be adopted by the end of the second calendar year.
This submission would
be made by December 31 of the first calendar year.
Copies of the approved amendments and the new opinion letter would have to be given
to adopting employers, and, if the adopting employers were required to make adoption
agreement changes, such changes would need to be made within 12 months of the
issues of the letter.
The Service noted that in many cases employers would not need to
take any action, and the M&P plan sponsor “would simply send employers copies of
the plan amendments that have been adopted on the employers’ behalf.”
Although this may be true for some basic, standardized plans, this does not take into
account non-standardized or more complex plans that allow for more employer
flexibility.
This option also does not take into account that certain legislation may be
more complex or offer more optional provisions.
As such, without Service model
forms, sample language or guidance, it may not be administratively possible to meet
these deadlines.
Under the five-year RAP with annual updates, if each year an amendment is required
and each of those amendments requires an adoption agreement (rather than just an
amendment to the plan document), individual employers will be required to amend
every year.
As a practical matter many employers will find this unacceptable, which
could lead to a decline in plan sponsorship, particularly in the small plan market.
We believe that an annual update option is completely unworkable from a prototype
sponsor’s perspective for many of the reasons discussed above.
We do see great value
in having the Service issue approved amendments for all upcoming required changes as
CC:PA:RU (Announcement 2003-32)
Internal Revenue Service
September 30, 2003
Page 9
it has done with EGTRRA.
However, the proposed time schedule may be difficult to
meet.
If the Service is late issuing guidance or is delayed in issuing opinion letters (as
could happen considering other pressing priorities), that could throw off the schedule
for both M&P plan sponsors and employers.
Conclusion
In short, we strongly advocate retention of the status quo.
If the Service concludes that
the status quo cannot or should not be sustained, then a uniform five-year RAP cycle for
M&P plans offers the best balance of interests.
It would provide a degree of simplicity,
while also providing flexibility for adoption and approval of various plan amendments
by both employers and M&P sponsors.
It also limits the extent to which multiple plan
documents will be circulated among adopting employers.
In so doing, it also facilitates
retirement plan coverage and qualified plan compliance.
In light of the many outstanding issues that would need to be resolved to achieve
workable reform of the determination letter process, we urge you to continue the course
of thoughtful study and engagement with relevant stakeholders.
The Council looks
forward to working with the Service to find meaningful ways to improve the
determination letter process.
In the meantime, if you have any questions or we can provide any additional
information, please contact Jan Jacobson, Director of Retirement Policy at 202-289-6700
or jjacobson@abcstaff.org.
Sincerely,
James A. Klein
President