IRS EXTENDS REMEDIAL AMENDMENT PERIOD AND ANNUITY SAFE HARBORS.

Notice 90-73

I. PURPOSE

This notice extends the period for amending plans qualified under section 401(a) or 403(a) of the Internal Revenue Code, extends certain safe harbors available to section 403(b) annuities, modifies the relief provided in Notice 88-131, 1988-2 C.B. 546, Notice 89-92, 1989-2 C.B. 410, and Rev. Proc. 89-65 , 1989-2 C.B. 786, and addresses the application process for amended plans.

II. SUMMARY

This notice addresses the following areas related to the extension of the remedial amendment period and the dates for compliance with certain requirements.

1. EXTENSION OF REMEDIAL AMENDMENT PERIOD

The expiration date of the remedial amendment period under section 401(b) of the Code for certain disqualifying provisions is extended until the end of the first plan year beginning after December 31, 1991. Although this extension enables the continued suspension of benefit accruals under Model Amendment 2 (Model 2) or Model Amendment 3 (Model 3) of Notice 88-131, if certain conditions are met, as noted below the relief provided under Alternative II D of Notice 88-131 for benefits accrued after the effective dates of certain qualification requirements will not continue into the 1992 plan year.

2. SECTION 403(b)(12) COMPLIANCE

The safe harbors under section 403(b)(12) of the Code provided in Notice 89-23, 1989-1 C.B. 654, which were scheduled to expire at the end of 1990, are extended until further guidance is issued under section 403(b)(12). Thus, employers may rely on a reasonable, good faith interpretation of section 403(b)(12) and/or the transitional safe harbors until further guidance is issued concerning these nondiscrimination rules.

3. ALTERNATIVE II D

The availability of the relief provided by Alternative II D of Notice 88-131 is no longer connected to the remedial amendment period, but will end with the 1991 plan year. Thus, benefit accruals in the 1992 plan year must meet the requirements of section 401(a)(4) of the Code.

4. NOTICE TO PARTICIPANTS

Plan sponsors are reminded that the suspension of benefit accruals for all participants under Model 3 beyond the last day of the 1990 plan year is conditioned upon providing the notice described in section 204(h) of the Employee Retirement Income Security Act of 1974 (ERISA) no later than the last day of the 1990 plan year. Suspension of benefit accruals for highly compensated employees beyond the last day of the 1991 plan year is also conditioned upon providing the notice described in section 204(h).

5. APPLICATIONS FOR APPROVAL OF PLAN AMENDMENTS

The deadline for submission of applications for sponsors of master and prototype plans that seek continued reliance on a prior opinion letter, and sponsors of master and prototype plans and regional prototype plans that seek extended reliance on a new letter, is extended to January 31, 1991. The Service anticipates that it will begin accepting applications for determination letters with respect to additional categories of plans, including defined benefit plans, early in 1991.

III. EXTENSION OF THE SECTION 401(b) REMEDIAL AMENDMENT PERIOD

A. BACKGROUND

Section 1.401(b)-1 of the Income Tax Regulations provides that a plan that fails to satisfy the requirements of section 401(a) solely as a result of a disqualifying provision defined under section 1.401(b)-1(b)(2)(ii) need not be amended to comply with those requirements until the later of the due date for filing the employer's tax return for the 1989 tax year (including extensions) or the last day of the 1989 plan year, or, in the case of a plan maintained by more than one employer, the last day of the tenth month following the end of the 1989 plan year. A disqualifying provision is defined in section 1.401(b)-1(b)(2)(ii) as a plan provision (or the absence of a plan provision) that causes a plan to fail to satisfy the qualification requirements of the Code because of changes made by the Tax Reform Act of 1986, Pub. L. No. 99-514, 1986-3 (Vol. 1) C.B. 1 (TRA '86), the Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509 (OBRA '86), and the Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, 1987-3 C.B. 1 (OBRA '87), that are effective before the first day of the first plan year beginning after December 31, 1989; a plan provision that is not required, but is integral to a qualification requirement changed by TRA '86, OBRA '86, OBRA '87; or a plan provision that fails to satisfy any requirement that is treated, directly or indirectly, by the Service as if section 1140 of TRA '86 applied to it (hereinafter collectively referred to as the "Tax Reform requirements").

Section 1.401(b)-1(b)(2)(iii) of the regulations also defines as a disqualifying provision any plan provision (or the absence of any plan provision) that results in the failure of the plan to satisfy the qualification requirements of the Code by reason of a change in those requirements made by amendments to the Code that are designated by the Commissioner, at his discretion, as disqualifying provisions described in section 1.401(b)-1(b)(2).

Rev. Proc. 89-65 extended the section 401(b) remedial amendment period for disqualifying provisions described in section 1.401(b)- 1(b)(2)(ii) until the last day of the first plan year beginning on or after January 1, 1991 and added to the definition of such disqualifying provisions changes in the qualification requirements of the Code made by the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, 1988-3 C.B. 1 (TAMRA), and those provisions that became effective on or after January 1, 1990 with respect to collectively bargained plans. Rev. Proc. 89-65 also extended the expiration date of the remedial amendment period for plans adopted or amended after December 31, 1987.

Section 1.401(b)-1(e) of the regulations grants the Commissioner the discretion to extend the section 401(b) remedial amendment period.

B. EXTENSION OF REMEDIAL AMENDMENT PERIOD

Pursuant to the grant of authority in 1.401(b)-1(e) of the regulations, the remedial amendment period is extended for disqualifying provisions described in section 1.401(b)-l(b)(2)(ii) to the last day of the first plan year beginning after December 31, 1991. The remedial amendment period is also extended until the last day of the first plan year beginning after December 31, 1991 for new plans adopted or existing plans amended after December 31, 1987 that fail to satisfy the qualification requirements of sections 401(a) or 403(a) as of the date the plan or amendment is adopted or effective (whichever is earlier).

In addition, pursuant to the authority of section 1.401(b)- 1(b)(2)(iii), this notice provides that the definition of disqualifying provision under section 1.401(b)-1(b)(2)(ii) includes a plan provision (or the absence of a plan provision) that causes a plan to fail to satisfy the qualification requirements of the Code because of changes made in such requirements by the Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, 1990-1 C.B. 210 (OBRA '89), or a plan provision that is not required, but is integral to a qualification requirement changed by OBRA '89. Thus, plans that do not satisfy the requirements of section 401(a) or 403(a) because of such a disqualifying provision may also be retroactively amended to meet such requirements at any time up to and including the last day of the 1992 plan year.

In order to be eligible for the extended remedial amendment period, a plan must continue to meet the requirements of section 1140 of TRA '86. Thus, with respect to requirements subject to section 1140, the plan sponsor must continue to operate the plan in compliance with such requirements from the applicable effective dates with respect to the plan. In the case of changed plan provisions that are not required but are integral to a qualification requirement changed by TRA '86, OBRA '86, OBRA '87, TAMRA, or OBRA '89, or any requirement which is treated, directly or indirectly, by the Service as if section 1140 applied to it, the plan will be eligible for the extended remedial amendment period only if the plan is operated in accordance with such changed provisions from the effective date of such changes under the plan. In addition, the plan sponsor must amend the plan for all Tax Reform requirements (including those effective after the 1988 plan year) retroactively to the date the applicable requirements become effective.

IV. EXTENSION OF SAFE HARBORS UNDER SECTION 403(b)(12)

Section 1120 of TRA '86 enacted section 403(b)(12) of the Code, which requires that annuities under section 403(b) be purchased under a nondiscriminatory plan. Notice 89-23 provides that, until further guidance, the Service will deem a section 403(b) annuity plan to comply with section 403(b)(12) if the employer administers it in accordance with a reasonable good faith interpretation of section 403(b)(12). The notice also provides certain safe harbors under which the Service will consider an employer to be operating a section 403(b) annuity plan in accordance with a reasonable, good faith interpretation.

Notice 89-23 makes the safe harbors applicable only to plan years beginning in calendar years 1989 and 1990, even though taxpayers may generally rely on Notice 89-23 until further guidance is published. This limitation is modified to permit reliance on the safe harbors until further guidance provides otherwise.

V. ALTERNATIVE II D DISCONTINUATION, AND ERISA 204(h) NOTICE

A. BACKGROUND

On December 13, 1988 the Service issued Notice 88-131, which provides relief from certain requirements of section 411(d)(6) of the Code to sponsors of qualified pension, profit-sharing and stock bonus plans under section 401(a) and annuity plans under section 403(a). Section 411(d)(6) provides, in general, that a plan amendment (other than an amendment described in section 412(c)(8)) may not decrease a participant's accrued benefit determined as of the later of the date of adoption or the effective date of the amendment. Although section 1140 of TRA '86 and section 401(b) permit an extended period of time for amending plans to comply with the Tax Reform requirements, neither section provides an exception to section 411(d)(6), with respect to plan amendments made to comply with the Tax Reform requirements after benefits accrue during the 1989, 1990, and 1991 plan years.

Plan sponsors may take advantage of the relief offered in Notice 88-131 by adopting one or more of the model amendments described in the Notice and/or following the requirements of an alternative (Alternative II D) set forth in the Notice. The options described in Notice 88-131 provide plan sponsors with additional time in which to make decisions about plan changes that might be necessary or desirable as a result of amendments to the qualification requirements.

Under Alternative II D of Notice 88-131, if a plan satisfied the requirements for qualification immediately before the 1989 plan year, benefit accruals under that plan arising on or after the first day of the first plan year beginning in 1989 under those prior plan provisions will not cause the plan to fail to meet the requirements of sections 401(a)(4) or 401(a)(26) of the Code for the 1989 plan year provided certain requirements are satisfied.

B. RELIANCE ON ALTERNATIVE II D

Notice 89-92 extended the use of Alternative II D through the end of the section 401(b) remedial amendment period. Pursuant to that extension and the extension of the remedial amendment period in Rev. Proc. 89-65, Alternative II D relief is available to plan sponsors until the end of the 1991 plan year. Pursuant to Section III of this notice, the remedial amendment period for Tax Reform requirements is now extended to the end of the 1992 plan year. Notwithstanding the extension of the remedial amendment period, however, plan sponsors may not rely on the relief provided by Alternative II D for benefit accruals after the 1991 plan year. Accordingly, the period for reliance on Alternative II D is severed from the remedial amendment period, and Notice 89-92 is so modified.

Thus, although a plan's provisions before its amendment for Tax Reform requirements might not otherwise meet the requirements of section 401(a)(4), those provisions will continue to produce benefit accruals for all participants, including highly compensated employees, until the plan is amended, retroactive to the 1989 plan year, for the Tax Reform requirements. Furthermore, although the pre- amendment benefit accruals are protected, the level of those pre- amendment benefit accruals for highly compensated employees will not obligate the plan sponsor to increase benefits for nonhighly compensated employees for plan years 1989, 1990 and 1991 under the amended plan, to levels that are nondiscriminatory relative to the pre-amendment accruals. Benefits that accrue in the 1992 plan year, however, must be nondiscriminatory.

Plan sponsors have three alternatives for the 1992 plan year. First, without further action, if a highly compensated employee accrues a benefit during the 1992 plan year under plan provisions before they are amended pursuant to the remedial amendment period described above to comply with the Tax Reform requirements, the plan, as amended, must provide benefit accruals in the 1992 plan year for any nonhighly compensated participants that are sufficient to insure that the benefit accrued in the 1992 plan year by any highly compensated employee is nondiscriminatory. Second, before the first day of the 1992 plan year, the plan sponsor can adopt Model 2 or Model 3 prospectively suspending benefit accruals in the 1992 plan year. As explained below, suspension of benefits in the 1992 plan year will require the notice necessitated by section 204(h) of ERISA. Third, the plan sponsor can amend the plan to comply with the Tax Reform requirements before benefits accrue in the 1992 plan year.

C. ERISA 204(h) NOTICE

In general, section 204(h) of ERISA requires that advance notice be given if a defined benefit plan or an individual account plan that is subject to section 302 of ERISA is amended to provide for a significant reduction in the rate of future benefit accruals. Plan sponsors that either intend to adopt Model 3 or have adopted and are operating under Model 3 are reminded that Rev. Proc. 89-65 provided that the suspension of benefit accruals for all plan participants under Model 3 beyond the last day of the 1990 plan year and until the last day of the remedial amendment period is effective only if the notice described in section 204(h) of ERISA is provided to all participants by the later of the last day of the 1990 plan year or 15 days before Model 3 is effective.

Furthermore, plan sponsors that either intend to adopt Model 2 or have adopted and are operating under Model 2 may suspend benefit accruals for all highly compensated employees under Model 2 beyond the last day of the 1991 plan year and until the end of the remedial amendment period only if the section 204(h) notice is provided to all highly compensated employees participating in the plan no later than 15 days before the first day of the 1992 plan year. A plan sponsor that suspends benefit accruals after the 1990 plan year in the case of Model 3, or after the 1991 plan year in the case of Model 2, and who provides the 204(h) notice by the time prescribed above for the applicable participants will be deemed to have satisfied the requirements of section 204(h) with respect to prior benefit suspensions under Model 2 or Model 3.

VI. DEADLINE FOR SUBMISSION OF MASTER OR PROTOTYPE AND REGIONAL PROTOTYPE PLANS AND PLANS FOR FURTHER OPENING THE DETERMINATION LETTER PROGRAM

The deadline for submission of applications for master or prototype and regional prototype plans to the Internal Revenue Service by mass submitters, sponsors, and sponsoring organizations of master and prototype plans that seek continued reliance on a prior opinion letter and sponsors of master and prototype plans and regional prototype plans that seek extended reliance on a new letter is extended to March 31, 1991. See Rev. Proc. 89-9, 1989-1 C.B. 780, with respect to master or prototype plans and Rev. Proc. 89-13 , 1989- 1 C.B. 801, with respect to regional prototype plans; see also Announcement 90-89, 1990-31 I.R.B. 60, July 30, 1990. The guidance necessary for submission of master or prototype and regional prototype plans is now available, and the Service does not anticipate changes in the applicable guidance that would affect plan design or require plan sponsors to reapply for opinion or notification letters for plans approved under TRA '86. Sponsors should note that Lists of Required Modifications (LRMs), which the Service uses in reviewing master and prototype or regional prototype plans, have recently been revised and are an aid to sponsors who are drafting or amending plans.

In the first quarter of 1991, the Service plans to open the determination letter program for additional categories of plans that have been amended for the Tax Reform requirements. The Service anticipates that the additional categories will include many defined benefit plans and adopters of master or prototype or regional prototype plans.

VII. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 89-65 and Notices 88-131, 89-23 and 89-92 are modified.

VIII. DRAFTING INFORMATION

The principal author of this notice is Carol Gold of the Employee Plans Technical and Actuarial Division. For further information regarding this notice, please contact the Employee Plans Technical and Actuarial Division's taxpayer assistance telephone service between the hours of 1:30 p.m. and 4 p.m. Eastern Time, Monday through Thursday on (202) 566-6783/6784 (not a toll-free call). Ms. Gold's telephone number is (202) 343-0729 (also not a toll-free call).