Proof IRS Does Care About Dotting I’s and Crossing T’s for Plan Amendments

We often run into clients who, when told about various detailed requirements to comply with the tax law, respond that they’ve never heard of anyone getting into trouble for this. That’s especially true if there is a cost involved in remaining compliant.

Qualified plans is an area we can run into this, especially as clients decide to go for “do it yourself” solutions they’ve seen promoted on the web. When, a few years later, they get a notice from the organization they got the plan document from that they need to pay a fee to get an amendment, they are likely to either a) ignore the letter or b) balk at paying the fee, thinking as noted above that they don’t know of anyone who got into trouble for not amending a plan.

We now have an insight into at least one employer for whom, it appears, this oversight may prove costly. The IRS this week released an email exchange from the Chief Counsel’s office. That email noted:

***** was correct when he said that a Revenue Procedure is “not law” because a Revenue Procedure does not have the force and effect of law, as a regulation does, but the underlying requirements of EGTRRA and the minimum distribution provisions are provisions of the Internal Revenue Code, and failure to comply with them will result in disqualification of the plan and loss of the tax benefits of qualified plan status. Rev. Proc. 2005-16, 2005-1 C.B. 674, 682, section 8 (maintenance of approved status by an M&P plan). Under that provision of Rev. Proc. 2005-16, the sponsor of an M&P plan is required to amend the plan to conform to changes in the law that were not taken into account when the opinion letter covering the plan was issued. In addition, each employer adopting a sponsor’s M&P plan is responsible for adopting any amendments to its plan required in order to comply with new guidance issued by the Service. The plan sponsor is required to “make reasonable and diligent efforts to ensure” that each adopting employer amends its plan when necessary to comply with guidance issued by the Service after the employer’s adoption of the plan. Rev. Proc. 2005-16, supra , at section 8.02. Accordingly, the Revenue Agent was correct in telling ***** that his law firm could not act on behalf of its clients in adopting the employer amendments required to conform to the provisions of EGTRRA and to the minimum distribution requirements. Those amendments have to be made by each adopting employer.

More ominously, the email goes on to note:

Since the employer in your case apparently did not adopt the amendments required to conform to the provisions of EGTRRA and to the minimum distribution requirements of the Code, the EP agent should proceed to examine the plan and issue an adverse determination letter holding that the plan is disqualified if that is the result of the examination.

So if you need some ammunition to convince a client that a failure to follow plan amendment requirements can cause problems in the real world, you may want to download CCA 200913053.

Advertisement