Good News for 412(d)(2) Amendments

By Judy Miller • January 22, 2016 • 0 Comments
Over the past several years, we have heard from our members that the IRS had taken issue with “412(d)(2)” plan amendments in the determination letter application review process — but an internal memorandum from the IRS contains some good news.

Some plan sponsors were being told that the amendments were “discretionary amendments” and therefore not permissible if adopted after the end of the year. As a result, some IRS reviewers were taking the position that a closing agreement would be necessary to avoid disqualification. ASPPA and ACOPA sent letters to the IRS on this amendment issue, as well as on the ability to recognize a 412(d)(2) election for funding and deduction purposes. Last year, we reported that the IRS had indicated that closing agreements with regard to 412(d)(2) amendments were being put on hold. At that time we expressed hope that this would be only a first step. That hope has been realized.

In December, the IRS issued an internal memorandum instructing EP Determination and Examinations employees that an amendment made in the first 2½ months of a year that increases benefits for service in the prior year does not adversely affect a plan’s qualification. The memo advises that this type of amendment is not a “discretionary amendment” that must be adopted before the end of the prior year, provided the amendment was not “operationally effective” until after the end of that prior year. This, of course, describes a typical “412(d)(2) amendment.” We are very pleased that this aspect of our 412(d)(2) concerns has been favorably resolved.

Funding and deduction concerns regarding 412(d)(2) still have not been addressed, and probably will not be resolved in the near future.

Judy Miller is the Director of Retirement Policy for the American Retirement Association.