SERVICE PROVIDES GUIDANCE FOR AMENDING QUALIFIED PENSION, PROFIT SHARING, AND STOCK BONUS PLANS TO COMPLY WITH REA.

Notice 87-28

This notice provides guidance concerning the extent to which sponsors of pension, profit-sharing, and stock bonus plans may continue to rely on favorable determination letters issued with respect to such plans in view of the issuance of temporary regulations (T.D. 8037 and T.D. 8038) under the Retirement Equity Act of 1984 (REA) as well as the enactment of technical corrections in Title XVIII of the Tax Reform Act of 1986 (TRA '86). Sponsors of individually designed plans which have not received determination letters that considered REA may not rely on prior determination letters.

BACKGROUND

The Deficit Reduction Act of 1984 (DEFRA) was enacted on July 18, 1984, and REA was enacted on August 23, 1984. In Announcement 84-100, 1984-45 I.R.B. 20, the Service generally provided that, effective as of November 5, 1984, determination letters with respect to the qualified status of pension, profit-sharing, and stock bonus plans under section 401(a) of the Internal Revenue Code would be issued that considered the requirements of DEFRA and REA. On July 19, 1985, temporary REA regulations were issued. TRA '86, enacted on October 22, 1986, includes technical corrections to DEFRA and REA. Most of the technical corrections are effective as of the effective dates of DEFRA and REA.

Section 1140 of TRA '86 provides, in general, that if any provision of subtitles A or C of Title XI of TRA '86 (sections 1101- 1147 and 1171-1177) requires an amendment to any plan, such amendment need not be made until the first plan year beginning after December 31, 1988 (or later in the case of certain collectively bargained plans) where such amendment is made effective retroactively and where the plan is operated in accordance with the requirements of such provision as of its effective date.

Notice 87-20, 1987-6 I.R.B. 17, provides guidance with respect to the amendments made by section 1139 of TRA '86 to sections 411(a)(11)(B) and 417(e)(3) of the Code.

RELIANCE ON FAVORABLE DETERMINATION LETTERS

Generally, sponsors of pension, profit-sharing and stock bonus plans that are the subject of favorable determination letters may rely on such letters provided that the requirements of section 14 of Rev. Proc. 83-36, 1983-1 C.B. 771, are satisfied. Some favorable determination letters considered DEFRA and REA but did not specifically consider the temporary REA regulations. In addition, TRA '86 included certain technical corrections to DEFRA and REA that are effective as if they had been included in the original law and are, in some cases, more restrictive than the temporary REA regulations and prior law. The extent to which sponsors may continue to rely on existing favorable determination letters subsequent to the issuance of temporary REA regulations and the enactment of technical corrections is set forth below. Generally, different rules apply depending upon whether the application for the determination letter was made before or after the issuance of the temporary regulations and before or after the enactment of technical corrections. Sponsors of plans which do not have determination letters that considered REA may not rely on prior determination letters with respect to that law.

A. POST-OCTOBER 21, 1986 APPLICATIONS. The sponsor of a pension, profit-sharing, or stock bonus plan that applied on or after October 22, 1986, (the enactment date of TRA '86) for a determination that such plan was qualified within the meaning of section 401(a) of the Code and which received a favorable determination letter may continue to rely on such letter with respect to the requirements of the technical corrections as described in Notice 86-13, 1986-46 I.R.B. 17, (the retroactive technical corrections) and the temporary REA regulations.

B. POST-JULY 18, 1985 AND PRE-OCTOBER 22, 1986 APPLICATIONS. The sponsor of a pension, profit-sharing, or stock bonus plan that applied on or after the date temporary REA regulations were published (i.e., July 19, 1985) and before October 22, 1986, for a determination that such plan was qualified within the meaning of section 401(a) of the Code and which received a favorable letter may continue to rely on such letter only if the conditions set forth in paragraph G. below are satisfied.

C. PRE-JULY 19, 1985 APPLICATIONS. The sponsor of a pension, profit-sharing, or stock bonus plan that applied before July 19, 1985, for a determination letter that such plan was qualified within the meaning of section 401(a) of the Code and which received a favorable determination letter that considered the temporary REA regulations (as determined under paragraph F. below) may continue to rely on such letter only if the conditions set forth in paragraph G. below are satisfied.

If the plan was the subject of a favorable determination letter that did not consider the temporary REA regulations (as determined under paragraph F. below), the plan sponsor may continue to rely on such letter only if the plan satisfies the conditions set forth in paragraph G. below and all of the provisions of the temporary REA regulations are satisfied in operation.

D. POST-OCTOBER 21, 1986 DETERMINATION LETTERS. Notwithstanding paragraphs B. and C. above, pursuant to Notice 86-13, a plan sponsor who received a favorable determination letter with respect to a plan after October 21, 1986, may rely on such letter with respect to the requirements of the retroactive technical corrections and the temporary REA regulations.

E. MASTER AND PROTOTYPE PLANS. Paragraphs A., B., C., and D. apply only to individually designed plans. A sponsor of a master or prototype plan who received an opinion letter after July 18, 1985, and any employer who adopted or may adopt such plan may rely on such a letter; however, adopting employers must satisfy the conditions set forth in paragraph G. below, except as otherwise specified in the opinion letter.

F. DETERMINATION OF WHETHER THE TEMPORARY REA REGULATIONS WERE CONSIDERED. A plan will be treated as having a favorable determination letter that considered the temporary REA regulations, if the plan's provisions as approved by the Service include the requirements listed below. The following list is to be used solely to test whether a plan's determination letter considered the temporary REA regulations and should not be considered to be a complete list of the requirements of the temporary REA regulations.

(1) Except in the case of distributions where the present value of the benefit was not in excess of $3500, a plan subject to section 417 of the Code requires that:

(a) the participant and spouse consent before a distribution is made at any time in a form other than a qualified joint and survivor annuity (QJSA);

(b) the participant consents before a distribution of a QJSA (as well as a distribution in any other form) is made while the benefit is immediately distributable (i.e., distributable before the participant has attained the later of age 62 or the plan's normal retirement age); and

(c) the surviving spouse consents before a distribution of a qualified pre-retirement survivor annuity (QPSA) is made while the benefit is immediately distributable (i.e., the participant, if alive, would have attained the later of age 62 or the plan's normal retirement age).

(2) A distribution from an annuity contract purchased by and distributed under a plan covered by section 417 satisfies the consent and other REA requirements.

(3) The plan requires that an interest rate not greater than the PBGC immediate interest rate must be used for calculating the amount of a distribution subject to section 411(a)(11) or 417(e) as well as for determining whether the present value of a benefit exceeds $3500. (See also TRA '86 section 1139.)

(4) The plan requires specific spousal consent to the election of an alternate beneficiary. (See, however, TRA '86 section 1898(b)(6).)

(5) A plan subject to section 417 requires that an unmarried participant receive a QJSA in the form of a single life annuity.

(6) A plan that is not subject to section 417 requires participant consent for a distribution before the benefit is immediately distributable (i.e., distributable before the participant has attained the later of age 62 or the plan's normal retirement age).

G. CONDITIONS

(1) The plan must be operated and amended in accordance with Notice 87-20 with respect to sections 411(a)(11) and 417(e) of the Code.

(2) The plan must be amended retroactively to the effective date prescribed in the temporary regulations or the technical corrections, as applicable, by the Section 1140 Plan Amendment Date as described below.

(3) The plan must be operated in accordance with the technical corrections to the extent the technical corrections' requirements are more restrictive than DEFRA, REA, or the temporary REA regulations, including retroactive correction where necessary.

In general, DEFRA, REA and the temporary REA regulations required plans to satisfy provisions indentical to or more restrictive than the technical corrections. The technical corrections, however, do include certain provisions that are more restrictive than DEFRA, REA, and the temporary REA regulations. These include but are not limited to the following requirements:

(a) The form of benefit payment can only be changed with spousal consent (Code section 417(a)(2) and TRA '86 section 1898(b)(6)).

(b) Notice to participants consistent with amended section 417(a)(3)(B) must be provided (TRA '86 section 1898(b)(5)).

(c) Spousal consent must be obtained at the time the accrued benefit is used as security for a loan (Code sections 417(a)(4) and (f)(6) and TRA '86 section 1898(b)(4)).

(d) The QPSA in a defined contribution plan must come proportionately from employee and employer contributions (Committee Reports on Code section 417(c)(2)).

(e) Participants vested only in employee contributions are treated as vested participants (Code section 417(f)(1) and TRA '86 section 1898(b)(8)).

(f) The annuity starting date is as required by section 417(f)(2) (TRA '86 section 1898(b)(12)).

(g) In the case of an ESOP, voting rights to participants must be provided in conformity with section 409(e)(5) (TRA '86 section 1854(f)(1)).

(h) A plan that provides medical benefits for retired employees and their beneficiaries must meet the requirements of section 401(h) (TRA '86 section 1852(h)).

PLAN AMENDMENT DATE

A pension, profit-sharing, or stock bonus plan will not be disqualified solely because it is not amended for the temporary REA regulations and the technical corrections as long as the plan operates in accordance with the temporary regulations and the technical corrections, and the plan is amended for such provisions retroactive to the effective date of such provisions at such time as it is amended as provided in section 1140 (the Section 1140 Plan Amendment Date).

A plan shall not be treated as failing to provide definitely determinable benefits or contributions or as failing to be operated in accordance with the provisions of the plan merely because such plan operates in accordance with this office.

NOTICE 86-13 MODIFIED

Notice 86-13 is modified as described in paragraph E. above with regard to the reliance provided to master and prototype plan sponsors and adopting employers under certain opinion letters received after July 18, 1985.