Compliance April 19, 2017

Cash Balance Plan Benefit Formulas to Be Examined

Generally, an IRS memo says, if the terms of the plan specifically allow the employer to vary the employee’s compensation used in the benefit formula, the plan would violate the definitely determinable rule.
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A memorandum directs Internal Revenue Service (IRS) Employee Plans (EP) staff reviewing benefit formulas in cash balance defined benefit plans to apply the analysis in an attached Issue Snapshot on Definitely Determinable Benefits.

In general, a qualified plan “within the meaning of section 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to his employees over a period of years, usually for life, after retirement,” the IRS notes. 

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According to the memo, for a cash balance plan, a determinations specialist reviewing a determination letter request, or an exam agent auditing a plan in which the benefit formula is not the subject of a determination letter, should follow the analysis (including examples) in the attached Issue Snapshot for determining whether a benefit formula based on only a portion of annual compensation, a special bonus, or other measure not based on annual compensation, is “definitely determinable.”

Generally, the memo says, if the terms of the plan specifically allow the employer to vary the employee’s compensation used in the benefit formula (e.g., an employee’s annual compensation less an amount designated by the employer), the plan would violate the definitely determinable rule.

The memo offers examples and would be a helpful guide for cash balance plan sponsors to assess whether their plan offers definitely determinable benefits.
Compliance April 18, 2017

May 1 Is Deadline for New Adopters of Pre-Approved Plans

DC plan sponsors with individually designed plans can convert to a pre-approved plan now that the IRS determination letter program has ended.
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The Internal Revenue Service (IRS) has extended the deadline from Sunday, April 30, 2017, to Monday, May 1, 2017, for certain employers to adopt a defined contribution (DC) pre-approved plan and apply for a determination letter, if permissible.

Notice 2016-3 previously extended the deadline from April 30, 2016, to April 30, 2017, to help employers who wanted to convert their existing individually designed plan into a current defined contribution pre-approved plan based on the 2010 Cumulative List. Plan sponsors with individually designed plan documents may want to adopt a pre-approved plan since the elimination of the five-year remedial amendment cycles for individually designed plans and other changes as described in section 4 of Rev. Proc. 2016–37.

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Plan sponsors are eligible for this extension if they adopt a plan after January 1, 2016, other than one that is a modification and restatement of a defined contribution pre-approved plan they maintained before January 1, 2016. The extension allows them until May 1, 2017, to:

  • Adopt a current defined contribution pre-approved plan.
  • Apply for a determination letter, if permissible.

If plan sponsors qualify for the extension and to file Form 5307, Application for Determination for Adopters of Modified Volume Submitter Plans (instructions), they should include a statement in the cover letter that their submission package:

  • Restates the plan as a current defined contribution pre-approved plan, and
  • Qualifies for the Notice 2016-3 extension.

Plan sponsors can file for a favorable determination letter until the extended May 1, 2017, deadline.

More information is here.

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