Compliance June 10, 2016

Committee Strongly Suggests IRS Not End Determination Letter Program

However, the committee made another suggestion assuming "there will be no IRS change of heart."
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The Employee Plans Subcommittee (EP Subcommittee) of the Advisory Committee on Tax Exempt and Government Entities (ACT) has attempted to identify viable approaches the Internal Revenue Service (IRS) could take to minimize the impact on the employee plans community, while respecting the challenges faced by the IRS budgetary shortfalls and personnel reductions in ACT’s 2016 Report of Recommendations.

The IRS announced in July 2015 its intent to eliminate the staggered five-year determination letter remedial amendment cycles for individually designed retirement plans and limit the scope of the determination letter program to initial plan qualification and qualification upon plan termination.

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According to the ACT report, the IRS has received numerous comment letters from the employee plans community in response to the request for comments in the announcement, which were resoundingly negative toward the change. The ERISA Industry Committee (ERIC) asked the IRS to reconsider, arguing that most large employers do not use predetermined or “off the shelf” retirement plans, instead choosing to individually design plans that best benefit their workforces. Other industry sources agree.

The EP Subcommittee makes three recommendations. The first recommendation is not to generally eliminate periodic determination letters under the determination letter program. But, the EP Subcommittee says it recognizes the IRS is not likely to accept this recommendation, “but it is a recommendation with which all members of the EP Subcommittee strongly concur.”

The second recommendation is to proceed as the IRS has so far, but only as a transition measure while it discusses the matter further with the employee plans community. “This would address IRS’s immediate workload problem concerning a backlog of determination letter applications, while providing time for a real interactive dialogue with the [employee plans] community,” the report says.

NEXT: Assuming no IRS change of heart

The third recommendation, which consists of 11 points, assumes there will be no IRS change of heart. The EP Subcommittee says it “recognizes that many of the points require difficult choices as to how best to allocate limited resources and that is why the EP Subcommittee would recommend the transitional approach set forth in the second recommendation.”

The key points of the third recommendation are:

  • The IRS should provide certainty of the availability of determination letters to as much of the employee plans community as is feasible. The EP Subcommittee has provided several possible ways to accomplish this.
  • The IRS should look for ways to make the pre-approved program more flexible.
  • The IRS should reduce the user fees for document sponsors of pre-approved plans.
  • The IRS should modify its Employee Plans Compliance Resolution System (EPCRS) so it can be used without a plan sponsor having a current determination letter and for issues identified on audit.
  • The IRS should expand the plan provisions that can be incorporated by reference to the Internal Revenue Code of 1986, as amended (the Code) or regulations to simplify plan documents.
  • The IRS should allow leniency for "immaterial" flaws in plan document language found on IRS examination.
  • The IRS should immediately confirm that protection under Code Section 7805(b) continues for any plan document language that remains unchanged from issuance of a prior determination letter and further consider the feasibility of accepting an independent private review as "good faith" compliance extending Code Section 7805(b) protection.
  • The IRS should provide sponsors with a safe harbor approach for converting an individually designed plan into a pre-approved plan or establish a program to review and approve such conversions.
  • The IRS should publish model amendments along with the Cumulative Lists and List of Required Modifications (LRMs).
  • The IRS should provide adequate time to adopt all interim amendments.
  • The IRS should ask Congress to increase and dedicate user fees for the determination letter program and dedicate such amounts for use by, and on behalf of, the determination letter program.

The ACT report is here.

The Markets June 10, 2016

PBGC Selects Firms for Smaller Asset Manager Program

Each firm will be given a core fixed income mandate because “research indicates that smaller asset managers are likely to add value relative to the benchmark with these assets.”
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The Pension Benefit Guaranty Corporation (PBGC) selected five investment management firms to participate in its pilot program for Smaller Asset Managers.

The Smaller Asset Managers Pilot Program, announced last year, was created to reduce barriers that smaller investment firms face when competing for the agency’s business. Before the pilot program, these contracts were out of reach because the minimum required assets under management, often in the billions, were too large for small firms to qualify.

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Each of the firms will be responsible for investing $175 million in U.S. core fixed income instruments. PBGC selected U.S. core fixed income as the initial asset class for the pilot because research indicates that smaller asset managers are likely to add value relative to the benchmark with these assets. Additionally, the majority of PBGC’s assets are invested in fixed income.

The firms are:

  • C. S. McKee, LP, Pittsburgh, Pennsylvania;
  • LM Capital Group, LLC, San Diego, California;
  • Longfellow Investment Management Co., LLC, Boston, Massachusetts;
  • New Century Advisors, LLC, Chevy Chase, Maryland; and
  • Pugh Capital Management, Inc., Seattle, Washington.

The firms will be evaluated on their performance, after fees, against the portfolio benchmark (Barclays Capital US Aggregate Bond Index) over a full market cycle of highs and lows at an acceptable level of risk.

To be considered for the program, firms had to manage a minimum of $250 million in assets, have a five-year performance history, and undergo the same competitive evaluation as other PBGC money managers. Additionally, PBGC limited its allocations to no more than 20% of a firm’s assets under management, which the agency says is in keeping with industry standards.

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