Tax laws have long required that qualified retirement plans timely adopt written plan documents and amendments. But what evidence must a plan sponsor provide to an IRS auditor to prove that they have timely adopted a written plan document and required amendments? The IRS recently addressed this question in Chief Counsel Memorandum 2019‑002 (the CCM), which advises that absent extraordinary circumstances, “. . . it is appropriate for IRS exam agents and others to pursue plan disqualification if a signed plan document cannot be produced by the taxpayer.”
The primary question addressed in the CCM was whether a taxpayer can argue that, based on Val Lanes Recreation Center Corp. v. Commissioner, T.C. Memo 2018-92, it meets its burden to have an executed plan document by producing an unsigned plan and evidence of a pattern and practice of signing plan documents. The IRS’s answer as outlined in the CCM is: No, at least not in the absence of extraordinary circumstances.
In Val Lanes, the IRS issued to the employer’s ESOP a favorable determination letter conditioned on the employer’s timely adoption of the proposed plan document and amendments. Later, the ESOP was selected for IRS examination. During the audit, the employer was not able to produce signed plan documents evidencing the ESOP’s adoption of the amendments upon which the determination letter was conditioned. Instead, the employer was only able to produce unsigned amendments including the requisite language and an unsigned restatement that included the requisite language. After concluding its audit, the IRS proposed to disqualify the ESOP on several grounds, including for failure to produce the signed plan document or amendments.
The employer challenged the IRS’s decision to disqualify the ESOP. The US Tax Court disagreed with the IRS, finding that the employer timely adopted the amendments based on “existence of the previously approved restated plan document and amendments and the credible explanation as to the absence of executed copies in the record[.]” The Tax Court gave weight to other pertinent facts, including: (a) a roof failure that caused extensive water damage to the employer’s facility, including to the plan documents; (b) testimony that the amendments were timely signed; and (c) the seizure by several US Department of Labor and IRS agents of documents and computers from the ESOP accountant’s home and business office, which resulted in the accountant being unable to access all of his records after the computers were returned.
In the CCM, the IRS explained that the holding in Val Lanes is limited to those specific facts, and that generally, a plan will face disqualification unless its sponsor can produce the signed and dated plan document in the event of audit. The CCM does not outline factors relevant for proving to the IRS whether a plan document has been validly executed in the absence of the actual signed document, meaning sponsors should continue to properly execute plan documents and retain such documents in accordance with Code Section 6001 and Treasury Regulation Section 1.6001-1(e).
Given the harsh consequences of plan disqualification that might apply if the requisite signatures cannot be shown, redundancies to ensure compliance and adequate record retention should be considered. To this end, plan sponsors should consider implementing the following procedures:
- Designating a point person, such as an internal benefits administrator or external benefits legal counsel, to coordinate the timely execution of plan documents and amendments and the retention of these documents
- Thoroughly documenting corporate action taken to adopt and execute plan documents (e.g., through minutes and/or formal resolutions)
- Retaining electronic copies of signed plan documents and ensuring that these electronic copies are “backed up”
- Keeping a plan amendment tracking document that includes information such as when the plan amendment was adopted, when it became effective, and when it was added to the plan document and summary plan description
Plan sponsors should also remember that they may seek IRS permission to correct a failure to adopt a required plan amendment through the voluntary correction program under the IRS’s Employee Plans Compliance Resolution System (EPCRS). Alternatively, plan sponsors may, in limited circumstances, correct a failure to adopt a required plan amendment without IRS approval through the self-correction program under EPCRS. Read more about self-correcting a required amendment failure.
Please contact the authors or your Morgan Lewis contacts if you have any questions about plan document execution and retention requirements, or if you are considering correcting any qualification failures through EPCRS.