Where We Stand on §412(d)(2) Amendments
When did we first realize that the IRS read IRC §412(d)(2) to mean something other than what it appears to mean? Concern arose with the §430 and §436 regulations published in October 2009, but it really came to the fore in 2011, when the Gray Book question on the subject was asked, and answered.
The §430 guidance acknowledged the availability of a §412(d)(2) election, but then limited its application:
§1.430(d)-1(d) “Plan provisions taken into account.
(ii) Plan provisions adopted after valuation date. If a plan administrator makes the election described in section 412(d)(2) with respect to a plan amendment, then the plan amendment is treated as having been adopted on the first day of the plan year for purposes of this paragraph (d). Section 412(d)(2) applies to any plan amendment adopted no later than 2-1/2 months after the close of the plan year, including an amendment adopted during the plan year. Thus, if an amendment is adopted after the valuation date for a plan year (and no later than 2-1/2 months after the close of the plan year), but takes effect by the last day of the plan year, the amendment is taken into account in determining the plan’s funding target and target normal cost for the plan year if the plan administrator makes the election described in section 412(d)(2) with respect to such amendment.”
(iii) Determination of when an amendment takes effect. For purposes of this paragraph (d)(1), the determination of whether an amendment that increases benefits takes effect and when it takes effect is determined in accordance with the rules of section 436(c) and §1.436-1(c)(5). For purposes of this paragraph (d)(1), in the case of an amendment that decreases benefits, ….. In either case, the determination of when an amendment takes effect is unaffected by an election under section 412(d)(2).” (Underline added)
And the reference section of the §436 guidance:
§1.436-1(c)(5) “Rule for determining when an amendment takes effect. For purposes of section 436(c) and this paragraph (c), in the case of an amendment that increases benefits, the amendment takes effect under a plan on the first date on which any individual who is or could be a participant or beneficiary under the plan could obtain a legal right to the increased benefit of the individual were on that date to satisfy the applicable requirements for entitlement to the benefit….”
There was no acknowledgement in the final regulations that the result of a §412(d)(2) election is that the amendment is “deemed to have been made on the first day of such plan year” for purposes of the §412.
In retrospect, the IRS’ position was clear in the regulations, but since it directly contradicted the law, it was frankly hard to believe they intended what it appeared they had said. Then the response to Question 4 in the 2011 Gray Book simply said an amendment is only reflected in FT and TNC for the prior plan year if it is “adopted and takes effect by the end of the prior plan year.” Again, no mention in the response of the §412(d)(2) statement that the amendment would be “deemed to have been made on the first day of such plan year.” With IRS doubling down on their position that the law does not mean what the law says, we wrote our first letter asking them to acknowledge that “deemed to have been made on the first day of such plan year” means whether or not it is effective is based on when it would have been effective if it had been adopted on the first day of the year.
There is still no resolution to this concern. It is still IRS’ position that a discretionary amendment made after the end of the year cannot be taken into account for funding (and hence deduction) purposes even if it is made within 2-1/2 months and the plan administrator makes an election under §412(d)(2). We continue to hound them on this, and we are told it is on their list of items to be addressed, but it is not near the top. And being on their list does not mean a resolution we will like. To my knowledge, no one has been denied a deduction. If you encounter someone who has been denied a deduction because of IRS’ position on §412(d)(2), please let me know.
What has been resolved? For a period of time, in the determination letter process, IRS began objecting to past 412(d)(2) amendments (and pre-PPA §412(c)(8) amendments), saying they violated the qualification requirements. The reviewer generally referred to Rev. Proc. 2007-44, which requires a discretionary amendment to be adopted no later than the last day of the plan year. Plan sponsors were told they had to enter into a closing agreement or withdraw the application to avoid a negative ruling. We wrote another letter, and met with IRS and Treasury to object to this practice, as well as their position on a §412(d)(2) election for funding purposed. They indicated that any adverse actions in the determination letter process would be put on hold, and it appeared that they were. It is this qualification issue that has been resolved.
A Dec. 16, 2015 IRS internal memo on “Deadline for Adoption of Discretionary Plan Amendments” provides guidance for IRS EP Determinations and Examinations employees reviewing §412(d)(2) amendments. The memo states that Rev Proc 2007-44 section 5.05(2) “does not bar a plan amendment that increases accrued benefits retroactively but is not operationally effective until after the end of that prior year,” and specifically directs determination agents and specialists to conclude an amendment increasing accrued benefits for a year that is made within 2-1/2 months after the end of the year does not adversely affect a plan’s qualification in form.
This is very good news, but leaves us hanging on the fundamental question of the impact of a §412(d)(2) election on funding and deductions. For now, IRS still says “No.”