Tax Court Disqualifies Plan for Not Adopting Required Amendments

By on May 11, 2011

by Nancy S. Gerrie, Stephen Pavlick and Brian A. Benko

Maintaining a retirement plan’s qualified status comes with certain administrative burdens.  For employers, few burdens are more onerous than required plan amendments. Throughout the year, employers are informed that they need to adopt a plan amendment because of recent changes to the law.  Some amendments appear to lack a purpose.  After all, what is the worst that could happen if a plan’s compensation definition does not include the transportation fringe benefit, especially where participants are not offered transportation fringe benefits?  Recently, in Christy & Swan Profit Sharing Plan v. Commissioner of Internal Revenue, T.C. Memo 2001-62 (Mar. 15, 2011), the Tax Court explained the importance of adopting all required amendments.

In Christy & Swan Profit Sharing Plan, the Tax Court retroactively revoked a one-participant plan’s qualified status because it had not adopted timely amendments to comply with recent law changes.  In particular, the plan had not been amended to include qualified transportation fringe benefits in the definition of compensation, as required by the Community Renewal Tax Relief Act of 2000.  Additionally, the plan did not amend the definition of eligible retirement plan to include annuity contracts and eligible deferred compensation plans, as required by the Economic Growth and Tax Relief Reconciliation Act of 2001.  Instead of adopting these required amendments, the plan relied on a general "declaration" stating that the plan was amended by general reference to incorporate all statutory and regulatory amendments necessary to retain qualified status.  The Internal Revenue Service (IRS) notified the plan of its deficient terms and explained the options available under the audit closing agreement program under the Employee Plans Correction Resolution Program (EPCRS).  The plan’s sole participant, however, chose not to participate in EPCRS.

The arguments for and against plan disqualification, in this case, highlight the importance of maintaining a plan document that complies with all qualification requirements.  The argument against disqualification was that the plan did not need to be amended for statutory changes that would have no effect on its operation.  In other words, the plan claimed that the amendments had no meaningful purpose.  The argument in favor of disqualification was that the plan was required to satisfy the qualification requirements in form and in operation.  The plan’s failure to amend for statutory changes must be made in the context of what might have happened, not what actually happened, i.e., the employer may offer transportation fringe benefits in the future.

In granting summary judgment in favor of the IRS, the Tax Court unequivocally resolved the dispute by stating the following: "The requirements that a plan must satisfy for qualification under section 401(a) must be strictly met.  Vague, general references in plan correspondence to such requirements are insufficient."

The Tax Court’s ruling reminds all plan sponsors of the importance of timely adopting required amendments.

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