compliance alert

April 4, 2013

IRS Cycle D Retirement Plan Filings: Gearing Up for Round Two

In accordance with the Internal Revenue Service (IRS) determination letter program,1 multiemployer plan documents are submitted to the IRS for a renewed determination of their qualified status under the Internal Revenue Code (IRC) every five years, on the schedule labeled Cycle D. The second Cycle D will start less than a year from now, on February 1, 2014. Given how much there is to do before then, it is not too soon for trustees of multiemployer pension and annuity funds to begin planning for this filing. This Compliance Alert discusses getting ready for the second Cycle D.

Why File for a Second Cycle D Determination Letter?

It is important for a plan to file for a new determination letter when its Cycle repeats because its old letter will expire on the repeat Cycle’s filing deadline. For example, letters from the first Cycle D will expire on January 31, 2015, the last day of the second Cycle D filing period.

This also is the case for those Cycle D plans with off-calendar years (plan years beginning February 2 or later) that deferred their first Cycle D filing until Cycle E, as permitted in the first Cycle D. These plans remained Cycle D plans, and unless the IRS grants another deferral, they will need to file their next determination letter requests by the second Cycle D deadline.2

A current favorable determination letter provides a number of advantages to a fund and its participants and beneficiaries. For example, it helps to ensure that trust assets grow tax-free, that participants and beneficiaries are not taxed on their benefits until the benefits are paid, and that participants and beneficiaries may rollover eligible amounts. In addition, for errors identified during an IRS audit or in the determination letter process, it helps limit the scope of the audit or of any retroactive corrections. It also permits the use of “self-correction” for significant errors under the IRS voluntary correction program (VCP).

Preparing for the Second Cycle D

To prepare for the second Cycle D, trustees should take the following steps:

  • Address “loose ends” from the first Cycle D (or E). Funds that were required to make additional amendments as a condition for receiving a favorable determination letter or that submitted a proposed restatement in the first Cycle D (or E) had 91 days after the date of the favorable determination letter to adopt the amendments and/or restatement. If the amendments or restatement were not adopted in time, the VCP offers certain correction options with reduced fees for corrections made by a certain date or submissions made within certain periods.3
  • Identify all plan amendments needed and made since the last filing. As was the case in the first Cycle D (or E), all required and discretionary amendments to the plan since the last submission will need to be included in the second Cycle D submission. All required amendments for the second Cycle D should be identified from the 2013 Cumulative List of Changes in Plan Qualification Requirements (Cumulative List) which will be published by the IRS and made available on its website late this year, typically in November or December. Review of the 2012 Cumulative List, available now, can provide a head start.4 Funds that included amendments required by the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) and the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) in their first Cycle D (or E) filing should remember to submit those amendments for review as part of the second Cycle D submission because the IRS did not review those changes in the first Cycle D. There might be additional issues to consider regarding amendments related to Funding Improvement Plans for funds in endangered status or Rehabilitation Plans for funds in critical status.
  • Consider the need for a VCP filing. Fund counsel should review all required and discretionary amendments made since the last filing to ensure that all were properly adopted as free-standing amendments by the applicable deadline. In the event that there are amendment-related concerns, various options under the VCP are available to correct both “non-amender” and operational issues. If the fund used VCP in the first Cycle D (or E), remember to review the procedural changes described in that VCP application to determine if those procedures have been effective in preventing repeated errors and further revise them if necessary. Funds that want to use these options might be well-served to start the process before they file for their second Cycle D determination letter.5
  • Review and update amendment procedures. This might be an appropriate time to review the fund’s amendment procedures, both operationally and as recorded in the plan or trust document. A fund’s operational procedures should help to ensure that discretionary amendments are adopted in the plan year they become effective (and not “at the next meeting” if that meeting is in the following plan year) and that all such changes are incorporated into free-standing executed (signed and dated) amendments. A fund’s written amendment procedures also should be reviewed to ensure that the fund has as much flexibility as possible in how and when it adopts amendments in order to facilitate timely adoption (e.g., ability to amend between meetings, ability for individuals to execute separate documents, delegation of amendment authority to one or two trustees). As part of this process, it is important to review the trust agreement, as discussed in the text box below, particularly if the plan’s amendment procedures are contained in its trust agreement.
  • Locate other filing-related documents. In addition to all of the plan amendments since the last filing, other documents must be included in the submission.6 In particular, if relevant portions of participation agreements, reciprocity agreements or collective bargaining agreements were included in the last filing, it might be necessary to obtain updated or additional material for the second Cycle D filing.
  • Determine who will prepare the plan restatement. A restated plan document must be submitted as part of the second Cycle D filing. The restatement must include all amendments adopted since the last determination letter filing. This will require having all amendments adopted since the first Cycle D (or E) submission integrated into the first Cycle D restatement to create the second Cycle D restatement. It appears that the restatement can be submitted as a proposed copy that has not yet been adopted by the trustees.7
  • Determine the preparation timing. Arrangements for preparation of the second Cycle D filing package should be made as soon as possible. Preparation of a restated plan document and the related materials can be complicated work that could stretch over several months. To ensure adequate time to prepare all of the necessary documents, work on restatement projects should begin this year.
  • Determine if nondiscrimination testing should be performed. If a plan has non-bargained participants, nondiscrimination testing related to those participants is generally required at least every three years unless a testing safe-harbor applies. IRC §401(k) plans must be tested annually for both bargained and non-bargained groups unless a testing safe-harbor applies. While the IRS no longer determines satisfaction of the nondiscrimination tests as part of the determination letter process, the three-year testing requirement (or annual requirement for §401(k) plans) remains, and in certain plan audit situations, the IRS will ask for the most recent nondiscrimination testing and backup. As a result, trustees might wish to determine whether the fund’s nondiscrimination testing should be updated, and, if so, initiate the process for gathering information and having the testing performed.
                 
Trust Agreements

Many funds have not updated their trust agreements in a number of years. In some instances, the IRS has been suggesting the need for such updates as part of information requests related to determination letter applications. If a fund’s plan amendment procedures are in the trust agreement, it might be appropriate to review the agreement at this time to ensure that that the agreement continues to reflect how the trust is operated and that there are no conflicts between the plan document and the trust agreement. Provisions that might need to be reviewed include:

  • Trustees’ general powers and authorities,
  • Governance procedures (e.g., allocations and delegations of authority),
  • Plan amendment procedures, and
  • Description of relationships with service providers (e.g., investment managers and recordkeepers).

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As with all issues involving the interpretation or application of laws and regulations, trustees of multiemployer plans should rely on their fund counsel for authoritative advice on the interpretation and application of the IRC. The Segal Company can be retained to work with trustees of multiemployer retirement plans and their fund counsel on second Cycle D filings.

 

1 The determination letter program is described in Revenue Procedure 2007-44, which is on the IRS website. (Return to the Compliance Alert.)

2 At this time, the IRS has not indicated whether it will grant another deferral. If it does so, that announcement likely will not be until late this year. (Return to the Compliance Alert.)

3 See §12.03 of IRS Revenue Procedure 2013-12, which is on the IRS website. At this time, the IRS also is considering requiring that an executed copy of these proposed amendments required as a condition for a favorable letter be submitted as part of the second Cycle D submission, presumably to confirm that the condition on the favorable First Cycle D (or Cycle E) letter was satisfied. See the instructions to the draft Form 5300 (Feb 2013 rev) p. 5 Line 3l. (Return to the Compliance Alert.)

4 The 2012 Cumulative List, IRS Notice 2012-76 is on the IRS website. (Return to the Compliance Alert.)

5 See Revenue Procedure 2013-12. (Return to the Compliance Alert.)

6 For more information on other documents that must be included, see a supplement to this Compliance Alert. (Return to the Compliance Alert.)

7 Annual IRS guidance on the determination letter process, Revenue Procedure 2013-6, indicates that “working copies” are no longer accepted as part of the determination letter submission. Informal guidance from IRS personnel confirms, however, that proposed restatements will be accepted. (Return to the Compliance Alert.)

 

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