Timely Qualified Plan Adoption Still Tricky after SECURE Act
A provision in the Setting Every Community Up for Retirement Enhancement, or SECURE, Act extends the latest date by which an employer can adopt a new tax-qualified retirement plan for a tax year and obtain a deduction for contributions made to the plan for that year.
Effective for plans adopted for tax years beginning after Dec. 31, 2019, the SECURE Act pushes out the date to the due date for the tax return, including extensions, for the employer’s tax year. Pre-SECURE Act law required the plan to be adopted by the last day of the tax year.[1]
What the SECURE Act does not change (or, more to the point, clarify) is what steps an employer must take to adopt a plan.[2]
IRS regulations provide the following guidance to employers that desire to put a tax-qualified retirement plan in place:
A qualified pension, profit-sharing, or stock bonus plan is a definite written program and arrangement which is communicated to the employees and which is established and maintained by an employer.[3]
With reference to this regulation, the Internal Revenue Service Office of Chief Counsel recently issued a memorandum,[4] which states that, in order for an employer to prove to an IRS agent conducting an examination that the employer has timely adopted a qualified plan, the employer must be able to produce a “validly executed plan document.” If the employer is unable to do so, the IRS agent is advised that “it is appropriate ... to pursue plan disqualification.”[5]
In reaching this rather threatening conclusion, the IRS chief counsel relies heavily upon the U.S. Tax Court case, Fazi v. Commissioner.[6]
In Fazi, the IRS successfully argued that a restated version of a tax-qualified retirement plan did not timely come into existence because the taxpayer maintaining the plan did not sign an agreement committing itself to a prototype plan document sponsored by a life insurance company.
The Tax Court based its holding in favor of the government on the following reasoning:
An unsigned and unadopted pension plan would not meet the letter or spirit of Section 401 [of the Internal Revenue Code] and the underlying regulations. The requirement for a "definite written program and arrangement which is communicated to the employees" has no meaning if the employer lacks a written plan which is available and under which the employer is contractually obligated or committed.
In addition to Fazi, the chief counsel memorandum quotes the legislative history to Title I of the Employee Retirement Income Security Act of 1974:
A written plan is to be required in order that every employee may, on examining the plan documents, determine exactly what his rights and obligations are under the plan.[7]
Interestingly, neither the Tax Court’s Fazi opinion nor the chief counsel memorandum take note of another Tax Court case, Engineered Timber Sales v. Commissioner.[8] In Engineered Timber Sales, the Tax Court stated that “the 'definite written program and arrangement' terminology of Section 1.401-1(a)(2), Income Tax Regs., should be broadly construed to encompass various formats, including a collection of writings which creates a specific permanent plan.”
Under this standard, resolutions adopted by a company’s directors, setting forth a detailed description of a retirement plan, or stating that the company is adopting a prototype plan adoption agreement, which had been completed but not signed, should suffice to establish a tax-qualified retirement plan, once the terms of the plan have been communicated to the company’s employees.
Importantly, the Tax Court’s opinion in Engineered Timber Sales included the following admonition:
A composite of documents would qualify as a Section 401(a) deferred benefit plan only when it embodies all plan elements expressly required by Section 401(a) which are both essential (1) to inform participating employees and their beneficiaries of their specific benefits, rights, and obligations, and (2) to insure the plan's enforceability.
Although the Tax Court ruled against the taxpayer in Engineered Timber Sales on the ground that the taxpayer failed to produce documents that met this requirement, the principle that multiple documents can constitute a “plan” for purposes of satisfying the requirement that a tax-qualified retirement plan be a definite written program, is nevertheless good law.[9] The chief counsel memorandum ignores this principle.
The chief counsel memorandum also disregards judicial interpretations of Section 1102(a)(1) of ERISA. Section 1102(a)(1), which is functionally similar to the IRS regulation, provides that “every employee benefit plan shall be established and maintained pursuant to a written instrument.”
In more than one case, Section 1102(a)(1) has been given an expansive interpretation. In Horn v. Berdon Inc. Defined Benefit Pension Plan,[10] for example, the U.S. Court of Appeals for the Ninth Circuit held that a directors' resolution prescribing how the surplus assets of a pension plan were to be distributed upon plan termination was to be treated as an amendment to the pension plan.
According to the court, “the only difference between a Plan amendment and a Board resolution is a matter purely of form — the title of the document.” With respect to the Section 1102(a) written instrument requirement, the court said, “there is no requirement that documents claimed to collectively form the employee benefit plan be formally labelled as such.”
The IRS, itself, has acknowledged, in PLR 200407021, that action taken at a meeting by a committee that bound a company “should be viewed as effectively amending [the plan] even if formal, written amendment did not occur until [a later date].” The criteria for determining when a plan has been adopted and when a plan has been amended, which derive from the same IRS and ERISA standards, are essentially the same.
A signed plan document or a signed plan amendment, at least to the extent that they are dated as of the date of signature, possess the virtue of simplifying the process of demonstrating to the satisfaction of an IRS agent when a plan or an amendment has been adopted. The chief counsel memorandum, however, overstates the negative implications to be drawn from the absence of a signed document.
The SECURE Act plan adoption extension is good news in that it provides extra time to put a qualified plan in place to obtain a contribution deduction for a tax year, but employers need to be mindful that adopting a qualified plan remains a complex process, which in the IRS’s view can only be accomplished by signing a plan document.
"Timely Qualified Plan Adoption Still Tricky after SECURE Act," by Dan Morgan was published in Law360 on February 21, 2020.
[1] The SECURE Act makes no changes to the labyrinth of rules used to determine the date that amendments to a tax-qualified plan must be adopted, an undertaking that can often force benefit attorneys into the semi-mystical realm of opining as to whether a particular amendment is “discretionary” rather than “required”.
[2] Individual retirement accounts, which share the deadline the SECURE Act sets for tax-qualified retirement plans, are put in place by opening a custodial account and, therefore, more easily come into existence than tax-qualified plans.
[3] Treasury Regulation §1.401-1(a)(2).
[4] Chief Counsel Memorandum AM 2019-002, Dec. 13, 2019, which can be found here https://www.irs.gov/pub/foia/am-2019-002.pdf
[5] The author leaves for another day the question of how long the employer must retain the signed plan. The Chief Counsel Memorandum merely references Internal Revenue Code Section 6001, which requires “Every person liable for any tax imposed by this Title, or for the collection thereof, shall keep such records, render such statements, make such returns and comply with such rules and regulations as the Secretary may from time to time prescribe.”
[6] 102 T.C. 695 (1994).
[7] ERISA, Conf. Rept. 93-1280 (1972, 1974-3 C.B. 415, 458. Title I of ERISA, among other things, governs the rights of plan participants.
[8] 74 T.C. 808 (1980).
[9] The Engineered Timber Sales collection of writings interpretation was quoted in a subsequent Tax Court case, G & W Leach v. Commissioner, TC Memo 981-91 (1981).
[10] 938 F.2d 125, 127 (9th Cir.1991).