ABA Members Offer Suggestions on Determination Letter Program

Enclosed please find comments on revisions to the employee plans determination letter program ("Comments"). These Comments are submitted on behalf of the American Bar Association Section of Taxation and have not been approved by the House of Delegates or the Board of Governors of the American Bar Association. Accordingly, they should not be construed as representing the position of the American Bar Association.

The Section of Taxation would be pleased to discuss the Comments with you or your staff if that would be helpful.

Principal responsibility for preparing these Comments was exercised by Christina Crocket and Robert A. Miller of the Employee Benefits Committee of the Section of Taxation. Substantive contributions were made by Venessa Blanco, Matthew Eickman, Peg Friel, Sarah Fry, Annemarie McGavin, Anne Meyer, Rhonda Migdail, Thomas Pevarnik, Stefan Smith, and Lisa Tavares. These Comments were reviewed by W. Walden Lloyd, Vice Chair of the Committee and Susan A. Wetzel, Chair of the Committee. These Comments were further reviewed by Mark A. Bodron of the Section's Committee on Government Submissions, Kurt L.P. Lawson, Council Director for the Committee and Peter H. Blessing, Vice Chair (Government Relations) of the Section.

Although the members of the Section of Taxation who participated in preparing these Comments have clients who would be affected by the federal income tax principles addressed by these Comments, or have advised clients on the application of such rules, no such member (or the firm or organization to which such member belongs) has been engaged by a client to make a government submission with respect to, or otherwise to influence the development or outcome of, the specific subject matter of these Comments.

Contacts:

These Comments are divided into several parts. Parts I and II discuss the history and current state of the DL program. Part III responds directly to the proposed changes described in Announcement 2015-19. Part IV contains additional recommendations which we hope the Service will find helpful as it develops future guidance in a post-DL environment. Part V discusses whether the proposed changes are consistent with the statutory history of ERISA² and congressional intent. More specifically, in Parts III and IV:

In Announcement 2015-19, the Service stated its intention to eliminate the determination letter program for IDPs, except in the case of new and terminating plans, effective January 1, 2017. At the end of Announcement 2015-19, the Service asked for comments on a number of specific issues related to the elimination of the DL program for IDPs. Part III of these Comments responds directly to proposed changes in Announcement 2015-19. Part IV contains additional recommendations which we hope the Service will find helpful as it develops future guidance in a post-DL environment. Part V discusses whether the proposed changes are consistent with the statutory history of ERISA and congressional intent. These Comments begin with a discussion of the history and current state of the DL program.

Congress effectively endorsed the Service's DL program by adding new procedural rules to it as part of ERISA. These included a requirement to notify interested parties when a DL request is filed and a procedure for requesting declaratory judgments directly from the Tax Court in the event of "a failure by the Secretary or his delegate to make a determination" regarding a plan's initial or continuing tax qualification.⁹ While ERISA did not require employers to seek DLs for their plan's qualified status under the Code, the legislative history shows that the sponsors of the law expected most employers to do so.¹⁰

Regulation section 601.201(o) and various Revenue Procedures outline the process for requesting DLs from key district directors, and set forth the specific provisions for which letters may be issued -- sections 401, 403(a), 405, and 501 -- with respect to the initial qualification a plan, as well as "amendments, curtailments, or terminations."¹¹ They also contain appeal procedures.

In the early 2000s, in circumstances similar to today's, the Service undertook an extensive review of the DL program as it applies to IDPs. It published a white paper outlining several possible alternatives to the existing program.¹² Ultimately, it chose to revise the DL program (rather than eliminate it) to include staggered remedial amendment cycles. ¹³ Basically, under the staggered cycle structure, an IDP falls into one of five five-year cycles based on the plan's employee identification number. Subject to certain limited exceptions, the plan is able to request a DL during the cycle's 12-month filing period (referred to as a "on-cycle" filing) and the resulting DL remains in effect until the plan's next five-year cycle opens. The current procedures for review and approval of DLs for IDPs under the staggered remedial amendment cycles are reflected in Revenue Procedure 2007-44.¹⁴

In Announcement 2015-19, the Service stated its intention to eliminate the DL program for IDPs, except in the case of new plans and terminating plans, effective January 1, 2017. Service representatives explained that this was necessary for a variety of reasons, including budget and manpower constraints and a desire to allocate resources to where they will be most effective, based, in part, on "lean six sigma" principles.¹⁵

We respectfully disagree with the Service's plan regarding the future of the DL program. We believe it underestimates the value of IDPs and the importance of a robust DL program in encouraging employers to adopt and maintain plans and protect participant benefits provided under such plans. DLs have tremendous practical value to sponsors of IDPs. They provide universally recognized evidence that the plan satisfies certain baseline qualification requirements under the Code and thus facilitate many kinds of common transactions. For example, a plan sponsor may be required to produce a current DL in the following common situations:

We believe the above supports the view that the current system provides for an appropriate allocation of risk to plan sponsors. This is especially true with respect to items two and five above. Without the availability to obtain a DL regarding a qualified plan's documentation compliance for their IDPs, law firms may be called upon by plan sponsors to issue opinion letters on plan qualification. We submit that, based on discussions with our members, the number of law firms that will be willing to issue such an opinion letter will be limited. And, with respect to those firms that will be willing to issue such an opinion letter, the cost will be substantial in many cases (e.g., a complex pension plan that has multiple formulas dating back decades), resulting in a substantial annual expense that may be charged to the plan itself, and the opinion most likely will have numerous caveats that may diminish the strength of the opinion. Moreover, in the case of defined contribution plans that cost in many cases will be borne directly by plan participants and beneficiaries.

We believe the value of the existing system to plan sponsors, participants and beneficiaries is worth emphasizing even in the face of the serious budgetary challenges faced by the Service because "lean six sigma" principles are fundamentally value-driven, i.e., they start with an assessment of customer needs and wants and then work backward to determine the best ways for a business or government agency to meet them with the resources available.

Nevertheless, we wish to be helpful regardless of the final outcome of this debate, and therefore, as indicated above, these Comments offer various recommendations for modifying the Service's proposal in Announcement 2015-19 to address both its budgetary and liability concerns and the plan community's need for it to continue reviewing IDP language to the extent possible, either through the DL program or otherwise.

Under section 401(b), Regulation section 1.401(b)-1 and other guidance,¹⁶ a qualified plan will be treated as satisfying section 401(a) even if the plan document does not contain all of the provisions it is required to contain or contains provisions that otherwise are inconsistent with the requirements of section 401(a) (together "disqualifying provisions") as long as an amendment correcting the disqualifying provision is adopted within the plan's remedial amendment period. The remedial amendment period during which an IDP may be timely amended ends on the later of: (1) the due date (including extensions) for filing the income tax return for the employer's taxable year that includes the date on which the remedial amendment period begins; and (2) the last day of the plan year that includes the date on which the remedial amendment period begins.¹⁷ Provided the employer or plan administrator files a timely DL application for the plan amendment, the remedial amendment period extends until the end of the 91-day period following the issuance of a DL from the Service.¹⁸

Pursuant to the discretion granted in Regulation section 1.401(b)-1(f), the Service has extended the regular remedial amendment period for disqualifying provisions to the end of a plan's applicable remedial amendment cycle, provided the plan sponsor timely adopted all required good-faith amendments.¹⁹ Section 9 of Revenue Procedure 2007-44 (and Revenue Procedure 2005-66 before that) established a system of five-year remedial amendment cycles for IDPs. In general, a plan's five-year remedial amendment cycle is determined by the last digit of the plan sponsor's employer identification number. A timely filed DL application will extend a remedial amendment period based on one of these five-year remedial amendment cycles just as it will extend a regular remedial amendment period.

Announcement 2015-19 explains that the Service will eliminate the remedial amendment cycle system in Revenue Procedure 2007-44 effective January 1, 2017. As a result, the extension of the remedial amendment period provided in section 5.03 of Revenue Procedure 2007-44 will not be available after December 31, 2016. The regular remedial amendment period definition in Regulation section 1.401(b)-1 would appear to apply from that point on.

By submitting a timely DL application, the existing system under Regulation section 1.401(b)-1 and Revenue Procedure 2007-44 allows an employer to extend the remedial amendment period long enough to provide the Service an opportunity to review the plan document and issue its determination that the plan document satisfies the section 401(a) requirements. If the Service determines that the plan document contains a disqualifying provision during its review of the plan document, the employer generally has an opportunity to amend the plan document retroactively so that it complies with section 401(a) because the plan is still within its remedial amendment period.

Without an ability to correct a plan document defect identified by a Service agent during a DL review, submitting a DL application on plan termination increases (rather than decreases) the potential exposure for plan sponsors, fiduciaries and participants. Moreover, it undercuts an underlying purpose of the DL program, namely to provide a ready mechanism under which plan qualification can be maintained and plan qualification requirements satisfied.

Extending the remedial amendment period until plan termination (or until a reasonable time after the employer is notified of the issue on a Service audit or DL request) is very similar to the approach which applies to section 457(b) plans maintained by governmental employers, which also cannot receive a DL. Section 457(b)(6) generally permits sponsors to amend such plans for compliance by the first day of the first plan year commencing "at least 180 days after the date of notification by the Secretary of the inconsistency" between plan administration and the requirements of section 457(b). Such an approach allows plan sponsors to address plan document issues uncovered as part of an audit. Utilizing a parallel approach with respect to IDPs would allow plan document issues uncovered as part of an audit or a DL request (such as on plan termination) to be addressed as part of those processes, without the imposition of penalties, as long as the requisite corrective amendment was adopted within a reasonable time after the issue was identified (e.g., in the case of an audit, before the beginning of the plan year starting at least 180 days after the audit, or in the case of a DL, within 90 days after the issuance of the DL). In the absence of regular opportunities for IDPs to receive DLs, we believe that the section 457(b)(6) approach reflects an appropriate model.

Even though we recommend that the remedial amendment period be extended, we recognize that it is important for plan documents to be kept in reasonable alignment with plan operations and changes in law. Consequently, we think it is appropriate for the extension of the remedial amendment period to be contingent upon timely adoption of good-faith amendments, as discussed in the next recommendation. This requirement will help ensure that the plan document remains an appropriate reference for plan administrators and participants regarding plan operations.

In the event that an indefinite extension of the remedial amendment period is deemed to be undesirable, an alternative approach would be to extend the remedial amendment period until the sixth anniversary of the due date (with extensions) of the Form 5500 for the year in which the amendment was first required (or in the case of a discretionary amendment, first adopted). Such an approach would allow plan sponsors a reasonable time, of a relatively similar length to the current five-year remedial amendment cycle, to adjust language previously adopted for more fulsome compliance, and also would allow the plan sponsor to address without penalty plan document issues, at least of relatively recent vintage, that are raised on audit.

Although the extensions described above would be helpful, they would not solve all of the fundamental issues involved with eliminating DLs for IDPs between implementation and termination. The benefit of having a plan reviewed periodically is that a compliant document provides the administrator with an accurate guide to rely on to ensure that plan operations follow the legal requirements throughout the life of the plan. Although extending the remedial amendment period until plan termination (or until a reasonable time after the employer is notified of the issue on a Service audit or DL request) will remove the gap in a plan's technical qualification, from a practical administrative standpoint, the employer may not discover (and subsequently correct) errors in the document until the review on plan termination. By that time, any prior errors could have existed for decades, potentially generating operational issues that would be much more expensive and difficult (if not virtually impossible) to fully correct than if identified during a periodic Service DL review under the current five-year cycle system.

Recommendation 2 -- Extend the Deadline for Interim and Discretionary Amendments

As further background with respect to interim amendments and their timing, it is noteworthy that the requirement to adopt interim amendments in order to obtain extended remedial amendment period relief is relatively new, and generally has been accompanied by the issuance of model amendments. During many past extended remedial amendment periods, such as for the Tax Reform Act of 1986,²¹ interim amendments were not required. Moreover, Congress has sometimes waived any requirements for interim amendments, as it did in section 1107 of the Pension Protection Act of 2006 (the "PPA").²² This history suggests that although interim amendments may be desirable in certain respects, they are not intrinsic to extended remedial amendment period relief.

In cases where the Service believes it is imperative for plan amendments related to changes in law to be adopted prior to the availability of model language, or for some reason cannot provide model language, we suggest that the deadline not be earlier than the due date with extensions for the Form 5500 for the plan year following the plan year during which the law becomes effective, provided the plan is in operational compliance during that period of time and subject to earlier adoption in cases where required to comply with section 411(d)(6). The reason for this suggestion is that in the absence of periodic DL submissions under the five-year remedial amendment cycle, the annual audit process associated with the Forms 5500 is likely to become an even more important part of the oversight of timely adoption of plan amendments, so allowing adoption by the Form 5500 due date would allow accountants, actuaries and practitioners to all provide input and oversight in a coordinated manner, at a time tied to regular annual plan processes, and provide plan sponsors with sufficient time to make the required plan amendments.

With respect to discretionary amendments, the Service could consider either retaining the current rule under which plan amendments must be adopted by the end of the plan year in which they become effective, or providing a rule under which, except to the extent required by section 411(d)(6) or other specific statutory requirements (such as the inability to retroactively adopt a 401(k) arrangement), discretionary amendments could be adopted by the due date with extensions for the Form 5500 for the plan year in which the amendment became effective. Either approach would allow the plan document to be kept in reasonable alignment with plan operation. The advantage of the Form 5500 due date approach is the same one mentioned in the preceding paragraph -- tying the amendment deadline to the Form 5500 would more readily allow the annual audit process to serve as a check on timely adoption of plan amendments. Moreover, in the event that the Service determines that interim amendments should be required prior to the issuance of model language, this approach would allow interim and discretionary amendments to have a single due date, which would simplify administration and lower confusion among all parties, including plan sponsors, plan fiduciaries, practitioners, accountants, the Service auditors and the Service agents, while still allowing plan documents to remain relatively current.

Whichever approach is used with respect to interim amendments, the Service would need to continue to publish guidance each year concerning required plan amendments. This guidance could also provide details on the deadlines for adopting interim amendments.

Recommendation 3 -- Expand the Use of Incorporation by Reference in Plan Documents, including Interim Amendments

With the elimination of the five-year remedial amendment cycle for IDPs, there is an even more compelling argument for incorporation by reference. Permitting incorporation by reference provides greater certainty that plan language satisfies the qualification requirements.

A logical starting point for expanding the ability to incorporate by reference is to permit plans to include those terms which the Code itself may indicate are to be provided in the plan document, while incorporating by reference the more extensive and detailed regulations interpreting the statutory terms. Where the regulations afford a plan sponsor a choice between compliance approaches, the plan would be required to set forth the choice that has been selected (or be treated as selecting the default alternative), but would not be required to set forth detailed provisions of the regulations themselves. This approach would honor the statutory terms while avoiding the additional length and complexity involved with having plan provisions set forth the regulatory provisions.

In the event the Service is not comfortable adopting a rule generally permitting plans to set forth Code provisions and incorporate regulatory requirements by reference, an alternative approach would be for the Service to provide a list of regulatory requirements which could be so incorporated. We suggest that such a list include sections 416 (in all cases) and 436, in addition to section 415, which by statute may already be incorporated by reference, and other regulatory provisions that already are permitted to be incorporated by reference.²³

In certain cases, the statutory terms themselves may be particularly lengthy and complex, and in those situations, the Service could consider permitting incorporation by reference of all or part of the statutory terms as well as the regulations. For example, with respect to section 416, it may be appropriate for the Service to permit plans to incorporate by reference the statutory rules for determining which employees are key employees and whether a plan is top heavy, while setting forth the statutory provisions regarding the enhanced vesting and minimum benefits to be provided if the plan is top heavy, and incorporating the regulatory provisions regarding all of the statutory requirements.

The incorporation by reference of a provision could make it more difficult for a participant to understand how the provision impacts his or her benefits. We believe that this can be avoided by requiring a plan's summary plan description to include a summary, non-technical description of the Code and regulatory provisions that are incorporated by reference so that participants are aware of these provisions and how they may be impacted by them.

B. Guidance to Assist Plan Sponsors that Wish to Convert an Individually Designed Plan into a Preapproved Plan

A number of steps would be necessary to accomplish this goal. First, the preapproved plan program would need to be expanded to cover all of the major types of plan designs. An important step in this direction was taken by expanding the preapproved plan program to encompass ESOPs and cash balance plans.²⁶ Nevertheless, there remain some types of plans which fall outside the preapproved plan program, including for example pension equity arrangements and multiemployer plans. In the event the Service determines it is not practicable to modify the preapproved plan program to encompass those types of plans, then we would urge the Service to continue to allow those types of plans to submit DL requests.

Second, the preapproved plan program would need to be expanded to address the situation, fairly common in large, complex plans, under which different employee groups have different benefit structures. Some examples include: different compensation definitions, different service counting provisions, different vesting schedules, different benefit or allocation formulas, different normal, early and vested deferred retirement eligibility, different options regarding time and form of distribution, different death or disability benefits, different loan, hardship or in-service distribution provisions, and different actuarial equivalency factors with respect to ongoing accruals, as well as with respect to grandfathered frozen benefits. Some provisions such as distribution options concededly could be reconciled for consistency absent cutback concerns, but modifying certain other provisions that are fundamental to participants' accrued benefits (e.g., compensation definition, service count, and benefit formula) may not be possible for any number of reasons (for example, due to collective bargaining requirements).

Third, in some instances, the Service would need to allow the plan document to be comprised of multiple preapproved plan documents, for instance with separate adoption agreements for different groups of participants. Section 414(l) and the regulations thereunder clearly permit a single plan to utilize multiple plan documents. Making clear that such an approach could also be utilized in the preapproved plan environment would remove a significant barrier to the use of preapproved plans by large, complex plans. Such an approach also would ensure that the plan document in its entirety contains language with respect to the legal requirements which the Service had previously reviewed and approved, a result which would give comfort to both the Service and the employer. Although having different benefit structures for different groups of employees might result in nondiscrimination testing complexities, those issues currently are handled as a matter of plan administration, subject to audit, rather than in a DL request, so this aspect should not preclude expanding the preapproved plan program to permit use of multiple preapproved plan documents to constitute the plan.

Another approach which could be of significant assistance to sponsors of complex IDPs that would like to shift to a preapproved plan would be to allow the plan to consist of the existing IDP for benefits accrued until the time of the conversion, and one or more preapproved plan documents with respect to accruals after that date. The existing IDP benefit accruals accrued prior to the conversion would remain protected by the plan's prior DL (with respect to the plan language and issues covered thereby, as recommended above), and future accruals would then be protected by the use of the preapproved plan document or documents. This approach would allow plans with existing provisions which are sufficiently unique as to not readily be brought into a preapproved plan document to nonetheless shift to use of a prototype plan in a manner which would not generate anti-cutback rule concerns (which conversions from an IDP to a prototype plan document often entails, even for relatively simple plans). The existing plan document covering the pre-conversion accruals would still need to be updated for changes in law, but that could be accomplished in a variety of ways (for example, by using the Service's model language, or providing that the substance of legally required amendments to the preapproved document would also apply to the prior document). Again, this approach would appear to be advantageous for both the Service and the employer by helping ensure both parties that the plan language, both before and after the conversion, had been reviewed for compliance.

We suggest that the Service also consider some additional steps as part of the glide path to assist plan sponsors with converting complicated plan designs to preapproved documents. These steps could include (i) step-by-step instructions for moving specific provisions to a preapproved document, (ii) a list of approved design options (possibly based on sample design trends from Form 5307 filings) that could be reflected in an adoption agreement addendum, and (iii) further relief for anti-cutback concerns related to the document changes.

C. Changes to Other Programs to Facilitate the Changes Described in Announcement 2015-19

Recommendation 5 -- Remove Determination Letter Requirements from the SCP, VCP and Audit CAP

For example, failing to remove the DL requirement for SCP would cause many IDPs to be ineligible for self-correction. We recommend that the Service also permit a retroactive amendment under SCP without a requirement to submit a DL application, especially when there is no negative impact on participants' benefits (in other cases, the Service could require a limited scope DL application with respect to the amendment itself). For example, if a 401(k) plan's compensation definition excludes bonuses and the plan sponsor erroneously includes bonuses in the definition of compensation, we recommend that the Service permit the plan sponsor to amend the plan's compensation definition retroactively to include bonuses using SCP.

With respect to nonamender failures that currently require simultaneous VCP and DL application filings, we recommend that the requirement for a DL application be eliminated for reasons similar to those indicated above. This change removes any requirement for a simultaneous VCP and DL application filing for operational failures. We assume this result -- fewer DL applications -- is consistent with the aims of Announcement 2015-19. Alternatively, the Service could require or permit a simultaneous limited scope DL application focused on the amendment itself, as suggested in the next section.

As a tangential matter, certain other Service programs require a DL as proof of qualified status. For example, the Service issues a Form 6166 U.S. residency certification for employee benefit plans with foreign investments. Plans with valid certifications in place may apply to foreign tax authorities, pursuant to various U.S. income tax treaties, for certain favorable tax treatment (e.g., special withholding rates on certain distributions). We recommend the Service review all programs that currently require DLs as proof of qualified status and eliminate the requirement, or replace it (if necessary) with alternative documentation, such as an affirmation by the employer that the plan is intended to be a qualified plan, or a listing of key provisions which have language of a type normally included in qualified plans (such as provisions related to section 401(a)(17) or 415 limits).

Recommendation 6 -- Provide VCP Compliance Statements with Substantive Relief

Recommendation 7 -- Reduce Audit CAP Sanctions for Nonamender Failures

There is precedent for a reduced sanction for these nonamender failures. Section 14.04(3) of Revenue Procedure 2013-12³¹ currently provides a 40% reduction of the fee otherwise applicable if the sole failure consists of the failure to adopt good faith, interim, or optional law change amendments before the plan's extended remedial amendment period expires. Additionally, if the sole failure consists of a failure to adopt an amendment required in connection with a DL within the remedial amendment period, the applicable fee is $1,000 regardless of the number of participants if the employer adopts the amendment within three months of the expiration of the remedial amendment period for adopting that amendment.³² Considering that plan sponsors may lose extended remedial amendment period protection after December 31, 2017, and reduced sanctions in section 14.04(3) and (4) of Revenue Procedure 2013-12 only apply if the remedial amendment period is open, we recommend that the Service expand this relief to cover a broader range of nonamender failures in a manner complimentary to the changes implemented for remedial amendment period and interim amendment guidance.

Recommendation 8 -- Limit Requirements for Retroactive Corrections of Plan Document Failures to the Standard Audit Cycle

In contrast, under the anticipated new regime, the Service's review and approval of plan language for IDPs generally would be available only for a new plan or upon plan termination. Plans typically exist for decades -- indeed one of the qualification requirements is that they be intended to be permanent. Consequently, on plan audit or as part of a DL request made upon plan termination, a Service agent may in the future identify a plan document qualification issue issues which arose decades in the past. If such a plan document failure is required to be corrected retroactive to the time it initially arose, it is possible, and in many cases even likely, that years' worth of operational corrections might need to be made, disrupting the good faith expectations of plan sponsors, fiduciaries and participants, alike. The potential expense, disruption and exposure involved are likely to cause many plan sponsors and their advisors to view continuing a plan under such a regime to be untenable.

To avoid this result, and make the new procedures fairer and more viable, we think it would be appropriate to limit the extent to which plan document failures must be retroactively corrected in order for the plan to be treated as qualified on an ongoing basis. A range of potential limits could be considered, but tying the limit to the periods covered by Forms 5500 due or filed within the six years before the audit or plan termination seems both legally justified and to strike a reasonable balance between the competing concerns of appropriate tax administration and risks to employers, employees and plan fiduciaries. In most contexts, the Service generally is foreclosed from investigating tax issues or seeking recovery with respect to periods that predate the standard three-year audit cycle, except that in the case of substantial underreporting, that period is extended to cover returns due or filed within the six years prior to the audit ("the extended six-year audit cycle"). The potential ability of the Service under the new regime to mandate changes which could go back before the beginning of that extended six-year audit cycle, and potentially decades before that time, would be anomalous, and effectively treat qualified plans and the employers that decided to voluntarily maintain them in a considerably harsher manner than other taxpayers. On the other hand, if only prospective changes were required, even with respect to meaningful plan document failures, employers might not have sufficient incentive to attempt to maintain their plans in a qualified manner. Having a standard which, in general, requires retroactive correction to the beginning of the extended six-year audit cycle would provide substantial incentive for employers, plan fiduciaries and their advisors to keep plan provisions and operations in compliance with applicable qualification requirements, thus reducing the potential exposure. Moreover, it would allow the Service auditors to focus, as presumably they typically would, on issues integrally related to audit periods the Service generally would use, rather than to the potentially distant past.

Section 1101 of PPA and section 7805 both provide authority to take the steps recommended herein. PPA section 1101 grants the Secretary "full authority to establish and implement the Employee Plans Compliance Resolution System (or any successor program) and any other employee plans correction policies, including the authority to waive income, excise, or other taxes to ensure that any tax, penalty, or sanction is not excessive and bears a reasonable relationship to the nature, extent, and severity of the failure." The ability to determine the scope of corrections required is an inherent part of the authority to establish and implement a correction policy, and the ability to forego requiring corrections retroactive to distant periods of time also would reasonably come within the authority to waive sanctions. Similarly, the general regulatory authority of the Service to "prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue" would encompass rules regarding the extent to which retroactive corrections with respect to prior years must be satisfied for a plan to be treated as qualified during a current year.

Furthermore, the position that in order for a plan to be qualified, any potential qualification issues must be corrected retroactively to the time that the issue first arose does not appear to be explicitly required by sections 401 and related provisions. Indeed, sections 402 and 404 focus on whether a plan is qualified during the relevant taxable year of the trust, employer, distributee or participant involved. Moreover, one could reasonably argue that the statute of limitation provisions in the Code provide a constraint on the ability (or at least appropriateness) of the Service requiring corrections with respect to events in closed years in order for a plan to be treated as satisfying the qualification requirements in a current year. Although requiring retroactive correction for plan document failures going back to the year in which the failure first occurred may be supportable on policy grounds in a context where DLs are available on a periodic basis, the fairness of rigidly maintaining such a position where such DLs are not available is questionable.

The approximate length of retroactive corrections under an extended six-year audit cycle standard also seems appropriate in light of other existing legal standards. For example, it would roughly comport with (though be somewhat longer than) the maximum length of retroactive corrections under the current five-year remedial amendment cycle procedures, for plans which have sought and received current DLs. It also would be similar to the length of potential retroactive corrections under the six-year remedial amendment period for preapproved plans. It also would be similar to the general six-year statute of limitations applicable under ERISA with respect to fiduciary breaches.³⁴ Plan document errors generally would not constitute fiduciary breaches, of course, since adopting plan amendments is a settlor function. Nevertheless, the six-year statute of limitations for fiduciary breach actions seems a reasonable standard for this purpose. If the plan document had been correct from the outset but the fiduciary had improperly administered it, any resulting claim for fiduciary breach would be subject to that general six-year statute of limitations.

In two situations, it would appear appropriate to diverge from the extended six-year audit cycle standard. The first is a situation in which the plan document failure involves a willful and material violation of the qualification requirements. Although the vast majority of plan sponsors design their plans in a good faith attempt to satisfy the qualification requirements, where there is a willful, material violation, it would appear inappropriate to shield an employer from the need to retroactively correct the issue back to the date of the failure. The second is a situation at the opposite end of the spectrum -- in which the plan language failure is minor, such as a small deviation from what the Service agent may conclude would have been the correct language. In our view, such foot faults should not require retroactive correction. Similarly, where the plan provisions at issue were not called into operation, in our view retroactive correction should not be required.³⁵

Recommendation 9 -- Allow Limited Review Program for Section 436 Provisions for Cycle B Plans

Recommendation 10 -- Permit Determination Letters for Certain Types of Individually Designed Plans

The expedited handling rules set forth in Revenue Procedure 2015-4, Section 9.03(3), also provide circumstances that may be appropriate for a limited DL review (generally, circumstances outside the employer's control that create a need for a letter to avoid serious business consequences).

Finally, the Service has only recently issued the final set of hybrid plan regulations related to changes under the PPA, and certain of the applicable requirements will become effective only for plan years beginning on or after January 1, 2017. Cash balance plans, as well as other hybrid plans, have not yet had an opportunity to receive DLs covering these very significant changes. Many employers have, however, shifted to hybrid plan designs, or made amendments to existing hybrid plans, with the reasonable expectation that a DL plan program would be available that would address the hybrid plan requirements. In this context, we think it is appropriate for the Service to provide the opportunity for all hybrid IDPs, including cash balance plans, to be submitted for a DL that covers the totality of the final hybrid plan regulations.

Recommendation 11 -- Issue Guidance Clarifying the Meaning of "New" Plan

Recommendation

We recommend that the Service issue clarifying guidance concerning the meaning of "new" plan and that the concept include any plan that has not received a DL as an IDP pursuant to a Form 5300 application, regardless of the plan's adoption date.

In addition, we think it is important to clarify the "new plan" concept in connection with plans that are formed through a plan merger, consolidation, spin-off or asset transfer, such as may often occur in a corporate transaction, in order to avoid confusion, both for plan sponsors, plan participants and the Service, regarding the scope of any remaining protection afforded by any prior DLs issued with respect to the prior plans in the transaction. In general, we believe that it is appropriate to view such transactions as creating new plans which should be eligible for initial DLs. We also recommend the Service clarify that at least through the time that such a DL can reasonably be requested and obtained, the employer, employees and plan fiduciaries will be entitled to continued reliance on the DLs covering the plans involved prior to the plan merger, consolidation, spin-off or asset transfer.

Not providing a DL program for IDPs involved in mergers, spin-offs or asset transfers in connection with corporate transactions is a real concern because it could have a chilling effect on a purchaser's willingness to assume sponsorship of, or transfers of assets from, the plans of sellers or the acquired entities. This will be the case especially if there are concerns that the plan might not meet the section 401(a) requirements (and purchasers often have these concerns, if for no other reason than the fact that they would have little in-depth knowledge regarding plan operations until after an acquisition). There already is a trend among purchasers to terminate plans, especially those sponsored by smaller target companies, before finalizing (or otherwise in connection with) a transaction, rather than merging them into the purchasers' plans. Removing the opportunity for a current DL that clearly covers the resulting plan may exacerbate this type of termination activity, significantly impacting retirement savings and creating unnecessary leakage with cash distributions at termination.

Finally, we think it would be helpful to clarify that an employer that adopts a preapproved plan but makes an amendment that causes it to become an IDP (for example, amending the basic plan document to permit an affiliated service group member that is not a controlled member to participate in the plan) will be allowed to request an initial DL for the plan. Announcement 2015-19 states that with the elimination of the five-year remedial amendment cycle system, a sponsor of an IDP may submit a request for a DL as an initial application, if no prior Form 5300 has been filed with respect to the plan. Announcement 2015-19 goes on to say that the Service will provide guidance on limited circumstances when this limitation will be waived. The circumstance here (amending a preapproved plan to become an IDP) should be one of those "limited circumstances." The language in Announcement 2015-19 could be read to permit this already, but it would be helpful to have this interpretation confirmed. Obviously, further guidance also would have to indicate the due date for filing the application. We believe that one reasonable option would be the due date for the tax return of the sponsor's taxable year in which the amendment was made.

Recommendation 12 -- Reopen a Modified Limited Review Determination Letter Program

We recommend that the revised program be designed to encompass more than "minor" plan amendments, while not being sufficiently broad to require the Service to review an entire plan. For example, the resulting program could refuse applications requesting a DL review for an entire plan restatement. On the other hand, the limited DL program could review:

Reinstating a modified Form 6406 program would be helpful especially for employers with IDPs that, as a practical matter, are unable to convert to a preapproved document.

The Service could extend the revised Form 6406 program to merger and acquisition activity that meets certain requirements, for example, a threshold plan asset value in the acquired plan or participant count in the acquired plan.

ERISA's legislative history is illustrative of Congress' intent for enacting these additional protections:

Section 7476 also provides that the Tax Court must determine that the petitioner (usually, the sponsor) issued any required notice to interested parties of the request for a determination from the Service and exhausted all administrative remedies available with the Service before the Court can issue a declaratory judgment or decree.⁴³ Additionally, the statute indicates that "[a] petitioner is not deemed to have exhausted its administrative remedies merely because the Service has failed to make a determination before the 270th day following the request for such determination." The Service's Internal Revenue Manual explains that the purpose of the 270-day period of section 7476(b)(3) "is a minimum period, enabling respondent to consider ruling requests without judicial interference."⁴⁴

ERISA section 3001 provides for certain procedures in connection with DLs, including notice to interested parties and also their opportunity to comment on the determination request. Interested parties here include employees who are interested parties under section 7476, and also the Secretary of Labor and PBGC.⁴⁵

Such a result would be inefficient for the Tax Court, employers and participants alike. Given that Congress clearly intended for employers and other participants to have recourse to the Tax Court where the Service failed to timely provide a favorable determination as to a plan's qualification, it might be inferred that Congress' expectation and intent was that the Service would continue to provide a DL program, including with respect to ongoing plans. In that context, in most situations the Service would either resolve the qualification issue with the plan sponsor, or have made an adverse determination, so that the Tax Court would be in position to act in its typical role of reviewing determinations made by the Service, as opposed to making the initial determination as to a qualification issue.

It is evident from the legislative history that Congress did not expect the remedy provided by section 7476 to stand alone absent determinations by the Service through the DL program. Thus, it would not be unreasonable to interpret section 7476 as containing an implied requirement for the Service to maintain a DL procedure for ongoing plans, including IDPs, rather than as only having efficacy for such time as a DL program is in effect. Such an interpretation would be bolstered by the underlying purpose of section 7476 to ensure that employers and other petitioners would have a mechanism for receiving a determination as to a plan's tax qualification, and of ERISA section 3001 to provide a mechanism for participants and other interested parties, including DOL and as applicable PBGC, to receive notice and opportunity to comment with respect to determinations as to plan's qualified status. Therefore, based on the foregoing, we believe that eliminating DLs for ongoing qualification of IDPs may be inconsistent with Congressional intent. The Service itself has noted in the past that to implement such changes to the DL program "enabling legislation modifying or eliminating the [7476 and 3001] requirements would be needed."⁴⁷

Such an approach could result in an inefficient and inappropriate use of government resources (for both the Tax Court and the Service) and private sector resources, alike, which would seem out of alignment with the "lean six sigma" principles which have been cited as a rationale for the proposed approach. Moreover, requiring the entire range of potential plan qualification issues to be evaluated initially by the Tax Court, rather than through an organized review process by experienced agents at the Service, also could lead to the uncertainty "coupled with the threat of the ultimate loss of the tax deduction" that Congress tried to avoid when it enacted section 7476 and ERISA section 3001.

Based on these considerations, we respectfully urge the Service to reconsider eliminating DL program for ongoing IDPs.

² References herein to "ERISA" are to Pub. L. No. 93-406, 88 Stat. 829 (1974), as amended, unless otherwise indicated.

³ References herein to a "section" are to a section of the Internal Revenue Code of 1986, as amended (the "Code" or "I.R.C."), unless otherwise indicated.

⁴ Rev. Proc. 2013-12, 2013-4 I.R.B. 313, as amended by Rev. Proc. 2015-27, 2015-16 I.R.B. 914, and Rev. Proc. 2015-28, 2015-16 I.R.B. 920.

⁵ References herein to a "determination letter" or "DL" are solely to a favorable determination letter or DL.

⁶ The current form of the DL generally provides that the plan's continued qualification in its present form depends on its effect in operation, citing Reg. § 1.401-1(b)(3) for this principle. Thus, the DL provides no protection from any operational errors that the Service may uncover during a plan audit. However, if the plan has a current DL, the Service generally will not challenge the plan's qualified status based on the provisions of the plan document.

⁷ Rev. Rul. 32, 1953-1 C.B. 265; Francis J. Amer, Pension Rules Restated, Highlights of New Procedures for Advance Rulings and Qualification, 92 Trust and Estates 319, 322 (1953).

⁸ Rev. Rul. 54-172, 1954-1 C.B. 394, § 2.03; see also Rev. Rul. 54-172, 1954-1 C.B. 394, § 4.04 ("The authority and procedure provided in Revenue Ruling 32, C. B. 1953-1, 265, with respect to the disposition by District Directors of requests covering the qualification of plans under section 165(a) of the Internal Revenue Code is continued, but for this purpose the letters issued by District Directors in response to such requests shall be considered and designated as 'determination letters.'").

⁹See ERISA §§ 1041(a) (adding I.R.C. § 7476) & 3001 (adding 29 U.S.C. § 1201).

¹⁰See General Motors Corp. v. Buha, 623 F.2d 455, 462 n.4 (6th Cir. 1980) ("In presenting the Conference Report to the Senate, Senator Harrison Williams, Chairman of the Committee on Labor and Public Welfare, stated: '. . . it is probable that in view of the new requirements [of ERISA] almost all pension plans will seek tax qualification. . . .' (1974) U.S. Code Cong. & Admin. News at pp. 5187-5188.").

¹¹ Reg. § 601.201(o)(2)(i) and (ii).

¹² Announcement 2001-83, 2001-2 C.B. 205 ("The Future of the Employee Plans Determination Letter Program: Some Possible Options").

¹³ Announcement 2003-32, 2003-1 C.B. 933 ("The Future of the Employee Plans Determination Letter Program: Evaluation of Public Comments and Additional Explanation of Staggered Remedial Amendment Period Option").

¹⁴ 2007-2 C.B. 54, modifying and superseding Rev. Proc. 2005-66, 2005-37 I.R.B. 509. Additional filing procedures are provided in Rev. Proc. 2016-6, 2016-1 I.R.B. 200 (which is issued annually).

¹⁵See Michael L. George, Lean Six Sigma: Combining Six Sigma Quality with Lean Production Speed (2002).

¹⁶See Rev. Proc. 2007-44, § 5.01, and similar previous guidance.

¹⁷ Reg. § 1.401(b)-1(d).

¹⁸ Reg. § 1.401(b)-1(e)(3).

¹⁹ Rev. Proc. 2007-44, § 5.03(1).

²⁰ Rev. Proc. 2007-44, § 5.03(1).

²¹ Pub. L. No. 99-514, 100 Stat. 2085 (1986).

²² Pub. L. No. 109-280, 120 Stat. 780 (2006).

²³E.g., I.R.C. §§ 401(a)(9), 401(k)(3) and 401(m)(2). See EP Determinations Quality Assurance Bulletin, FY-2010 No. 2, "Code Sections Which May Be Incorporated by Reference" (Dec. 7, 2009), https://www.irs.gov/pub/irs-tege/qab_120709.pdf.

²⁴ 2015-27 I.R.B. 1234.

²⁵ 2011-44 I.R.B. 608.

²⁶ Rev. Proc. 2015-36.

²⁷ Rev. Proc. 2013-12, § 4.03.

²⁸ Rev. Proc. 2013-12, § 6.05.

²⁹ Rev. Proc. 2013-12, §§ 14.02 & 14.04.

³⁰ Rev. Proc. 2013-12, § 10.08(2)(a).

³¹ 2013-4 I.R.B. 313.

³² Rev. Proc. 2013-12, § 14.04(4).

³³See, e.g., Family Chiropractic Sports Injury & Rehab Clinic, Inc. v. Commissioner, 111 T.C.M. (CCH) 1046 (2016) (citing Pulver Roofing Co. v. Commissioner, 70 T.C. 1001, 1015 (1978), and Martin Fireproofing Profit-Sharing Plan & Trust v. Commissioner, 92 T.C. 1173, 1184-1189 (1989)).

³⁴ ERISA § 413, 29 U.S.C. § 1113.

³⁵ Although not directly on point, Aero Rental v. Commissioner, 64 T.C. 331 (1975), viewed the fact that no circumstances arose which caused the objectionable provisions of the plan to be called into operation, as well as the employer's exercise of reasonable diligence in attempting to obtain a DL, as sufficient grounds to allow relief from the amendment timing requirements of section 401(b). The first factor would also seem relevant in weighing the extent to which retroactive amendments should be required under correction programs going forward, in a context in which DLs for ongoing IDPs are not available.

³⁶ 2011-52 I.R.B. 923 n.2.

³⁷ Form 6406 (Short Form Application for Determination for Minor Amendment of Employee Benefit Plan).

³⁸ That is, a DL that takes into account all of the changes in the qualification requirements made by (1) the Uruguay Round Agreements Act, Pub. L. No. 103-465, 108 Stat. 4809 (1994), (2) the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. No. 103-353, 108 Stat. 3149 (1994), (3) the Small Business Job Protection Act of 1996, Pub. L. No. 104-188, 110 Stat. 1755 (1996), (4) the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788 (1997), and (5) the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685 (1998). See Rev. Proc. 2000-27, 2000-1 C.B. 1272.

³⁹ That is, a DL that takes into account all of the changes in the qualification requirements made by the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, 115 Stat. 38 (2001) (with technical corrections made by the Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, 116 Stat. 21 (2002)). See Notice 2001-42, 2001-30 C.B. 70.

⁴⁰ H.R. Rep. No. 93-779, at 105 (1974); S. Rep. No. 93-383, at 112-113 (1974).

⁴¹See the discussion in the "Statutory and Regulatory Framework" section of the white paper referenced in Announcement 2003-32, The Future of Employee Plans Determination Letter Program: Some Possible Options (Aug. 8, 2001) (to implement such changes to the DL program "enabling legislation modifying or eliminating the [7476 and 3001] requirements would be needed").

⁴² I.R.C. § 7476(a)(2)(A) and (B).

⁴³ I.R.C. § 7476(b)(2) & (3).

⁴⁴ I.R.M. 35.3.8.2 (Aug. 11, 2004).

⁴⁵ ERISA § 3001(b)(1).

⁴⁶ H.R. Rep. No. 93-1280, at 331 (1974) (Conf. Rep.).

⁴⁷See note 41.