December 4, 2014
IRS Issues New Guidelines for PEP Determination Letter Process
In a series of recent notices from Internal Revenue Service (IRS) headquarters to its fields offices, the agency provided details of the new process for processing determination letter applications for pension equity plans (PEPs).
A PEP is a type of hybrid pension plan under which the benefit is expressed as a lump sum amount based on an accumulated percentage of a participant’s final average compensation, rather than as an annuity payable at normal retirement age. The IRS issues determination letters to indicate whether a benefit plan meets the requirements for qualification.
The IRS published new procedural guidelines, the PEP Determinations Worksheet and Explanation of PEP Plan Issues, for IRS employees to use in processing determination letter applications. The agency also released a memorandum sent to IRS Employee Plans (EP) personnel to provide direction on the accrued benefit rules under Section 411(b)(1)(G) of the Internal Revenue Code.
The documents explain the issues unique to PEP plans that EP employees must take into account when reviewing plan documents, such as how the provision of hypothetical interest impacts the plan’s compliance with the accrual rules of Internal Revenue Code Section 411(b)(1). The PEP Memorandum highlights the plan document’s compliance with IRC Section 411(b)(1)(G), which generally provides that a participant’s accrued benefit under a qualified defined benefit plan cannot be reduced on account of any increase in the participant’s age or service.
These documents raise a number of questions with respect to how the IRS will review PEPs in the context of determination letter requests, especially in the context of IRC Section 411(b)(1)(G). The Council has been very active at the IRS, Treasury and the Hill in advocating for plan sponsor flexibility with respect to cash balance and PEP design issues. And the Council has also emphasized that any adverse new interpretations of the rules should be prospective only, especially in light of the absence of prior guidance on critical issues. The new guidelines announced by the IRS are ambiguous with respect to whether they set forth adverse new rules. A key issue is whether the accrued benefit under a PEP is permitted to decrease on account of, for example, a participant’s final average compensation staying the same or not increasing materially. The new guidelines are not entirely clear on this point.
The Council has already talked to Treasury about potential concerns with these new guidelines. We look forward to continued discussions so as to preserve plan sponsor flexibility with respect to PEP plan designs and, in all events, protect plan sponsors from retroactive liability.
The IRS also announced on December 3 that beginning January 2, 2015, the authority to issue various guidance documents will shift from the Tax Exempt and Government Entities (TE/GE) Division to the Office of Associate Chief Counsel, Tax Exempt and Government Entities.
In Announcement 2014-34, the agency stated that “the authority to prepare revenue rulings, revenue procedures, announcements and notices,” as well as certain private letter rulings and information letters involving qualified retirement plans, exempt organizations and individual retirement accounts, will shift to the TE/GE Counsel.
The counsel also will have authority over rulings on issues involving employer deductions for welfare benefit plan contributions. The Employee Plans office of TE/GE will maintain the authority to issue determination letters. The shift is part of the realignment that the agency is undertaking that involves moving employees of TE/GE to the Office of Chief Counsel.