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• Publié par: Nuhok
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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

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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.

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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

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Internal Revenue Service

September 30, 2003

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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,

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Internal Revenue Service

September 30, 2003

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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

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Internal Revenue Service

September 30, 2003

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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

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Internal Revenue Service

September 30, 2003

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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

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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 [e-mail].

Sincerely,

James A. Klein

President