ASCi Winter 2009 Newsletter

In this issue:

Extension of 403(b) Plan Document Requirement

The IRS has released Notice 2009-3 which extends the date by which an eligible employer must adopt a written 403(b) plan document until December 31, 2009. This extension came as a surprise to everyone as IRS officials had continuously stated that no extension would be granted. The IRS justified their decision based on the lack of any current program for employers to receive a favorable opinion or determination letter. Notice 2009-3 confirms the IRS’ intention to establish a pre-approved plan program and a determination letter program for 403(b) plans. ASCi will be submitting the 403(b) plan to the IRS as a pre-approved document when the IRS opens its program. In the meantime, we recommend that practitioners continue to encourage plan sponsors to adopt a 403(b) plan document as soon as possible since the plan sponsor must operationally comply with the final Code §403(b) regulations starting January 1, 2009. A formal plan document will assist in ensuring operational compliance.

Important Clarification Regarding Completion of 403(b) Plan

Under AA §3-1(f) of the 403(b) Plan adoption agreement, an Employer may elect to exclude from participation employees who normally work less than 20 hours per week or some lesser number of hours. Because of confusion relating to the application of the minimum service requirements of ERISA §202(a), we have modified §202(a)(5) of the basic plan document to reflect that a plan subject to Title I of ERISA must meet the requirements of ERISA §202(a) and, therefore, must allow employees to enter the plan if such employee satisfies the minimum age and service conditions of Title I of ERISA. By including this “override” provision in the basic plan document, employers may still elect to exclude employees who are expected to work less than 20 hours per week but will be protected against violations of the ERISA minimum age and service requirements. The following is the change made to Section 2.02(b)(5) of the 403(b) basic plan document. We have added the second paragraph to address this issue.
2.02(b)(5) Employees who normally work fewer than 20 hours per week The Employer may elect under AA §3-1(f) (subject to the conditions in Code §410(b)(4)) to exclude Employees who normally work fewer than 20 hours per week (or such lower number of hours per week as elected in the Agreement) with respect to Salary Deferrals, Employer Contributions and Matching Contributions. An Employee normally works fewer than 20 hours per week if and only if (1) for the 12-month period beginning on the date of the Employee’s Employment Commencement Date, the Employer reasonably expects the Employee to work fewer than 1,000 Hours of Service and (2) for each Plan Year after the close of the 12-month period beginning on the date of the Employee’s Employment Commencement Date, the Employee worked fewer than 1,000 Hours of Service in the preceding 12-month period. If a Plan is covered by Title I of ERISA, the Plan must satisfy the minimum age and service requirements of ERISA §202(a) and an Employee otherwise excluded under AA §3-1(f) must enter the Plan no later than the first day of the Plan Year or 6 months (whichever is earlier) following the attainment of age 21 and completion of a Year of Service. For this purpose, an Employee is credited with a Year of Service if such Employee is credited with 1,000 Hours of Service in the 12-month period starting with the Employee’s Employment Commencement Date or in any Plan Year commencing after the Employee’s Employment Commencement Date.
Given the IRS announcement in Notice 2009-3, it would appear that any employer who adopted the 403(b) plan prior to the addition of the above language and who selected the option to exclude employees who are expected to work less than 20 hours, may operationally comply with this requirement through the end of 2009. We have formatted the change to the 403(b) BPD so that the above amendment can be accomplished by substituting the new page for the old page in the BPD (i.e., the change does not affect any other pages of the 403(b) BPD).

Status of ASCi Owners-Only 401(k) Plan

ASCi recently has received comments from the Internal Revenue Service relating to our Owners-Only 401(k) Prototype Plan. This process has taken some time as the IRS has dealt with staffing issues and the submission of the defined benefit prototype and volume submitter plans. ASCi has responded to the IRS comments and, hopefully, the IRS will complete its review and issue a favorable opinion letter for the plan in the near future. We will keep you up to date on the IRS review process. While the comments from the IRS on the Owners-Only 401(k) Plan were not extensive, we do expect changes in the final approved version of the plan. Any changes in the approved document will be reflected on DGEM after final IRS approval. In the meantime, it is important to remember the following:
  1. While DGEM users may currently place plans on the Owners-Only 401(k) Plan document, these plans will need to be re-executed by adopting employers onto the final IRS-approved document.
  2. As we indicated before, adopting employers may only rely on the IRS opinion letter for the Owners-Only 401(k) Plan from the date the IRS received a sponsor’s application. If you applied with the original ASCi submission in April 2008, that is the relevant date.
  3. The Owners-Only 401(k) Plan should not be used to restate an employer’s plan for EGTRRA if the intent is to receive retroactive reliance back to the effective date of EGTRRA (in some cases back to 2002.) If you have a client that needs this retroactive reliance, you should first restate the plan on either the EGTRRA-approved prototype or volume submitter plan and then convert the plan to the final approved Owners-Only 401(k) Plan.

PPA Technical Corrections Passed – Extends Amendment Deadline for Defined Benefit Plan PFEA Amendment

Congress has passed the Worker, Retiree and Employee Recovery Act of 2008, which includes Technical Corrections to the Pension Protection Act of 2006. As we write this, we are awaiting final enactment, which we expect. The Technical Corrections Act includes an extension of the amendment date for the Code §415 changes under the Pension Funding Equity Act of 2004 (PFEA). PFEA amended Code §415, applicable for plan years beginning in 2004 and 2005. Originally, the deadline for making a plan amendment to reflect this change was the last day of the 2006 plan year. PPA 2006 extended the deadline to the last day of the 2008 plan year. Now the PPA Technical Correction Act extends the deadline until the last day of the 2009 plan year. The ASCi interim amendment reflecting the Code §415 final regulations includes provisions that are intended to comply with the PFEA requirements. Adoption of the Code §415 interim amendment will satisfy both the Code §415 final regulations amendment deadline and the PFEA amendment deadline at the same time.

Use of DGEM Clause Substitution Feature

We have had a number of questions regarding the use of the Clause Substitution feature under the DGEM system. Currently, the Clause Substitution feature may be used for any Version 1 or Version 2 document to create an Amendatory Agreement and resolution to adopt the Plan amendment. We are currently updating the Clause Substitution module to provide a Summary of Material Modifications (SMM) for Version 2 plans. If a plan is currently on a Version 1 document, you should be using the Create Restatement feature instead of the Clause Substitution option to amend the plan. Restating a document automatically converts the data in the Version 1 checklist to the Version 2 checklist and allows a user to create an approved plan document. If an amendment is being made to a Version 2 document, the Clause Substitute feature may be used. However, at this time, the DGEM system will not create an SMM. If you need to produce an SMM for an amendment to a Version 2 document, you may use the following sample language to create an SMM. We have placed a sample SMM on the Download page that can be used as a guide to create an SMM until the Clause Substitution feature is updated for Version 2 documents.

Frequently Asked Questions

To assist users in answering some of the more common questions, we have added a FAQ section to the DGEM system. You can access the FAQ section from the menu at the bottom of any page within the DGEM system. The following are a few of the most recent FAQs added to the DGEM system. 1. Converting a document from version 1 to version 2 Problem: I have a PS VS document on version 1. I need to upgrade to version 2 to correspond to my IRS approved document. When I select “Convert Version 2 Document Type” from the menu, I receive a message that there is no conversion type available. How do I upgrade the document to version 2? Solution: The “Convert Version 2 Document Type” button is designed to convert a VS document to a Prototype document (or vice versa). To convert a VS PS plan from Version 1 to Version 2, you should choose the “Create Restatement” option from the drop-down list. That will automatically update your checklist to a Version 2 checklist. You can then run a Validation check to answer any questions that did not carry over to the Version 2 document. 2. DB Documents and Amendments Problem: I noticed that a new DB document does not come with any amendments. Shouldn’t there be at least a 415 amendment and maybe a PPA amendment like the DC docs? Solution: The DB document on the system has been updated for Code §415 and PFEA. We also have a separate Code §415/PFEA amendment for DB plans that are not on the DGEM system. We will be adding a PPA and HEART Act amendment sometime in 2009. We are waiting as long as possible to get as much guidance as possible from the IRS. Once we get our document approved by the IRS, we will add a PPA and HEART Act snap-on amendment. (We currently do have a PPA/HEART Act amendment for terminating DB plans on the DGEM system.) 3. How do I customize my Wizard cover letter? Problem: I would like to put my letterhead on a cover letter produced by a DGEM Wizard. Solution: Wizard cover letters are customizable, including the text and the letterhead. Send the letterhead in an email attachment(s) to Attach either a Word document; a jpg or gif; or a PDF file. 4. Differences between VS documents Problem: What is the difference between the PS/401(k) Traditional VS AA and the PS/401(k) VS AA? Solution: The DGEM system has both an Adoption Agreement (AA) version of the VS PS/401(k) document and a more “traditional” version. The traditional version has an Appendix to the base document that contains the specific language based on the selections chosen in the checklist. Thus, instead of an AA check-the-box approach, the traditional version feeds language related only to the selections actually chosen in the checklist. The specific language is then fed into an Appendix at the end of the basic plan document; it is not fed into the specific sections of the document like some VS plans. The traditional document is designed for those users who do not like the check-the-box feel of an Adoption Agreement. Due to the extensive programming involved, Version 2 of the traditional document will be available in the first quarter of 2009.