SunGard Relius

In reviewing the Notice, keep in mind the goals of the IRS. The IRS does not want to delay the process of amending plans for GUST because both the IRS and practitioners have already allocated significant resources to this process. The IRS is also aware that having extended periods of operational compliance with changes in the law followed by retroactive amendments is problematic. Thus, there is a desire to have plans amended for EGTRRA within a reasonable period of time. In addition, the IRS is sensitive to the inefficiencies that would be present if employers are required to amend their plans for GUST, and then within a short period of time, amend their plans for EGTRRA.

The GUST Remedial Amendment Period
With that as background, Notice 2001-42 makes it clear that the general GUST remedial amendment period (which is generally the last day of the 2001 plan year) will NOT be extended. However, for plans that are able to use the "12-month rule" that applies to adopters of certain prototype or volume submitter plans, the GUST remedial amendment period has been extended to the later of December 31, 2002, or the expiration of the 12-month period (the end of the 12th month beginning after the date on which the Service issues a GUST opinion or advisory letter for the prototype or volume submitter plan). This change simplifies the determination of when an employer's plan must be updated for GUST because it is expected that a significant number of prototype and volume submitter plans will be approved before the end of this year. The result is that for most plans there will be a single deadline of December 31, 2002, rather than different deadlines that are based on when a prototype or volume submitter plan is approved.

Amendments for EGTRRA
Most plans will need to be amended for EGTRRA no later than the end of the 2002 plan year, or if later, by the end of the GUST remedial amendment period. The Service will generally not permit a plan to operate in accordance with a change that is required, or permitted, by EGTRRA beyond the end of the first plan year to which the provision applies. The EGTRRA amendment must be a "good faith" amendment. By making this "good faith" amendment, an employer will be entitled to an EGTRRA remedial amendment period that will not end before the end of the plan's 2005 plan year. This would permit a plan to be retroactively amended, if necessary, to cure any disqualifying defects in the "good faith" amendment.

The IRS will NOT issue determination, opinion or advisory letters on any EGTRRA amendments. However, they have stated that by the end of this August they will issue sample "good faith" amendments that can be used verbatim or as a basis for drafting individualized "good faith" EGTRRA amendments. More details on the EGTRRA amendment process are expected to be issued when the amendments are released.

EGTRRA plan amendments may be needed sooner
Some plans may need to make amendments for EGTRRA before the 2002 deadline. This is because some changes made by EGTRRA, if made to a plan on a retroactive basis, could result in a violation of the IRC §411(d)(6) anti-cut back rules. The IRS can only provide limited relief from these rules and has included examples of situations where a retroactive amendment can be made.

The changes to the top-heavy rules present the most likely situation where a cut-back of benefits could occur. For example, under current Regulations, a plan cannot use matching contributions to satisfy top-heavy minimum contribution requirements. EGTRRA has changed this rule beginning with 2002 plan years. But, there is a potential cut-back of benefits for non-key employees if an EGTRRA amendment is made on a retroactive basis to take matching contributions into account for top-heavy minimums (e.g., the pre-amended terms of the plan would require an additional top-heavy minimum yet the non-key might not be entitled to this additional contribution under the EGTRRA amendment). Other examples include situations where a plan is top heavy under existing rules but would not be top-heavy under EGTRRA (e.g., because of either the change to the definition of key employee or the 1 year look back for certain distributions).

The IRS has included a reminder that for defined contribution plans, top-heavy minimum benefits do not accrue until the last day of the plan year. Thus, the EGTRRA amendment dealing with the top-heavy changes could be made prior to the last day of the 2002 plan year without violating the anti-cut back rules. However, this is not the case for defined benefit plans (the top-heavy minimum is generally accrued after a participant has been credited with 1,000 hours of service). Thus, for defined benefit plans, Notice 2001-42 provides that an amendment made for a calendar year plan will not be considered a violation of the anti-cut back rules if the amendment for the 2002 plan year is adopted before May 31, 2002, or in the case of a plan using the elapsed time method, March 31, 2002.

It is important to note that Notice 2001-42 does not provide relief from the ERISA §204(h) notice requirements regarding reduction in benefit accruals (which have also been modified by EGTRRA). In addition, no IRC §411(d)(6) relief is provided for the changes made to the defined benefit IRC §415 limits. For fiscal year defined benefit plans (meaning any that begin 01/02/01 or later) that incorporate the IRC §415 limits by reference (i.e., where the increases "pop-up"), an amendment may be needed right away if an employer does not want the limits to automatically increase.

We will have more details regarding the EGTRRA amendment process once the IRS issues more guidance, and we will notify you as developments are known.