Remedial Amendment Period Modifications and Other Technical Clarifications

Seyfarth Synopsis: In November 2022, the Internal Revenue Service (IRS) issued Revenue Procedure 2022-40, which made modifications impacting the remedial amendment period for both individually-designed qualified 401(a) plans and 403(b) plans, as well as clarifications about eligibility of a qualified plan for an initial determination letter and the timing of a determination letter filing regarding a plan merger. Significantly, in that same Revenue Procedure, the IRS announced expansions to its Determination Letter Program which for the first time will permit individually-designed 403(b) plans to apply for a favorable determination letter, which we have covered in a separate Legal Update found here. 

Revenue Procedure 2022-40 modifies the remedial amendment period for: (1) disqualifying provisions in individually-designed qualified 401(a) and 403(b) plans; and (2) form defects (first occurring after June 30, 2020) in individually-designed 403(b) plans. During the remedial amendment period, a plan sponsor may retroactively amend the plan to correct any disqualifying provisions or form defects.  

Remedial Amendment Period

Disqualifying Provisions and Form Defects

A disqualifying provision in a qualified 401(a) plan is either: (1) a provision of a new plan, the absence of a provision from a new plan or an amendment to an existing plan that causes the plan to fail to satisfy the qualification requirements as of the date the plan or amendment is first made effective; (2) a plan provision that has been designated by IRS guidance as a disqualifying provision by reason of a change in qualification requirements; or (3) the absence from a plan of a provision required by, or integral to, a change in the qualification requirements.

In parallel to the disqualifying provisions rules for 401(a) plans, a form defect in a 403(b) plan is either: (1) a provision of a new plan, the absence of a provision from a new plan or an amendment to an existing plan that causes the form of the 403(b) plan to fail to satisfy the Code Section 403(b) requirements applicable as of the date the plan or amendment is first made effective; (2) a provision that results in the failure of the form of the plan to satisfy the Section 403(b) requirements by reason of a change in those requirements; (3) a plan provision that is integral to a form defect described in clause (2) above; or (4) the absence from a plan of a provision required by, or integral to, a change in the Section 403(b) requirements.

Beginning Date of a Remedial Amendment Period

In general, under Regulation §1.401(b)-1(d)(1), the remedial amendment period with respect to a provision or the absence of a provision in a new qualified 401(a) plan begins on the date the plan is put into effect. For an existing qualified 401(a) plan, the remedial amendment period generally begins on the earlier of the date a disqualifying provision is adopted or effective. 

The Revenue Procedure expands the availability of a remedial amendment period to apply to form defects (first occurring after June 30, 2020) in a 403(b) plan. With respect to a form defect relating to a provision or the absence of a provision in a new individually-designed 403(b) plan, the remedial amendment period begins on the date the plan is put into effect. With respect to a form defect relating to an amendment to an existing individually-designed 403(b) plan, the remedial amendment period generally begins on the earlier of the date the amendment is adopted or effective. The above is consistent with the treatment of 401(a) plans; however, a different rule described in the Revenue Procedure applies to a form defect related to a change in the Section 403(b) requirements or integral to such a change.  With respect to a form defect arising from change in the Section 403(b) requirements, the remedial amendment period begins on the date a change effected by a change in the Code or a change in requirements published in an Internal Revenue Bulletin becomes effective with respect to the plan. With respect to a form defect integral to a change in the Section 403(b) requirements, the remedial amendment period begins on the first day on which the plan was operated in accordance with such provision, as amended.

Ending Date of a Remedial Amendment Period

Non-Governmental Plans

The remedial amendment period for a disqualifying provision or form defect for a new non-governmental plan ends on the last day of the second calendar year following the calendar year in which the new plan is put into effect. The remedial amendment period for a disqualifying provision or form defect for an existing non-governmental plan ends on the last day of the second calendar year following the calendar year in which the amendment is either adopted or effective, whichever is later. Additionally, when related to a disqualifying provision or form defect that arises as a result of a change in qualification requirements or Section 403(b) requirements, the remedial amendment period will end on the last day of the second calendar year that begins after the issuance of the required amendments list in which the change in qualification requirements or Section 403(b) requirements appears. If a non-governmental plan terminates, the plan’s termination will end the plan’s remedial amendment period.

Note that although Regulation §1.401(b)-1(e)(3) provides for an extension of the remedial amendment period of a 401(a) plan if a request for a determination letter is made before the end of the period, the Revenue Procedure did not address whether such an extension would apply to a 403(b) plan.  We are hopeful that such an extension will be provided in future guidance.

Governmental Plans

The remedial amendment period for a disqualifying provision or form defect for a new governmental plan ends on the later of: (i) the last day of the second calendar year following the calendar year in which the new plan is put into effect; or (ii) 90 days after the close of the third regular legislative session of the applicable legislative body with the authority to amend the plan that begins after the end of the plan’s initial plan year. The remedial amendment period for a disqualifying provision or form defect for an existing governmental plan ends on the later of: (i) the last day of the second calendar year following the calendar year in which the amendment is either adopted or effective, whichever is later; or (ii) 90 days after the close of the third regular legislative session of the applicable legislative body with the authority to amend the plan that begins after the calendar year in which the amendment is adopted or effective, whichever is later. Additionally, when related to a disqualifying provision or form defect with respect to a governmental plan that arises as a result of a change in qualification requirements or Section 403(b) requirements, the remedial amendment period will end on the later of: (i) the last day of the second calendar year that begins after the issuance of the required amendments list in which the change in qualification requirements or Section 403(b) requirements appears; or (ii) 90 days after the close of the third regular legislative session of the applicable legislative body with the authority to amend the plan that begins on or after the date of issuance of the required amendments list in which the change in qualification requirements or Section 403(b) requirements appears. If a governmental plan terminates, the plan’s termination will end the plan’s remedial amendment period.

Clarifications for Determination Letter Filings

Initial Determination Letter

Revenue Procedure 2022-40 also clarifies that in situations such as where the IRS previously issued a ruling regarding a qualified 401(a) plan following a filing for a pre-approved plan, e.g. on Form 5307 relating to a volume submitter plan or on Form 5300 regarding “leased” employees, that plan if later amended to be individually-designed would still be treated as eligible for a ruling as to its initial qualification.

Application for a Determination upon Plan Merger

Revenue Procedure 2022-40 continues to permit sponsors of individually-designed qualified 401(a) plans (e.g., a 401(k) plan), but not 403(b) plans, to apply for a favorable determination letter on Form 5300, if the application is for a determination upon a plan merger. 

For purposes of a qualified 401(a) plan applying for a favorable determination letter upon a plan merger, the Revenue Procedure reaffirms the definition stated in Revenue Procedure 2019-20. Thus, a “plan merger” is defined as a merger or consolidation that: (1) combines two or more qualified 401(a) plans maintained by previously unrelated entities into a single individually-designed plan; and (2) occurs in connection with a corporate merger, acquisition or other similar business transaction among unrelated entities that each maintained its own plan or plans prior to the plan merger.

Under Revenue Procedure 2022-40, an individually-designed qualified 401(a) plan will be eligible for a determination upon a plan merger only if: (1) the date of the plan merger occurs no later than the last day of the first plan year that begins after the plan year that includes the effective date of the corporate merger, acquisition or other similar business transaction between unrelated entities; and (2) the determination letter application for the merged plan is submitted within the period beginning the effective date of the plan merger and ending on the last day of the first plan year of the merged plan that begins after the effective date of the corporate merger, acquisition or other similar business transaction. Clause (2) is a clarification of Revenue Procedure 2019-20 as to when the time for submission ends.

Conclusions

The modifications made by the Revenue Procedure to the remedial amendment period for qualified 401(a) plans, and the expansion of remedial amendment period to include form defects (first occurring after June 30, 2020) in individually-designed 403(b) plans, in the context of the IRS determination letter program are helpful in establishing the availability of relief under the Employee Plans Compliance Resolution System (EPCRS) programs. Regulation §1.401(b)-1(d)(3) provides for an extension of the remedial amendment period if a qualified 401(a) plan files for a determination letter before the end of the remedial amendment period. The Revenue Procedure does not address whether the same holds true for individually-designed 403(b) plans. The clarification regarding eligibility for an initial determination letter is helpful for plans that converted from a pre-approved format to be individually-designed.  Similarly, the clarification regarding the deadline to apply for a ruling regarding merged 401(a) plans removes some previous ambiguity regarding that deadline.

Please reach out either to the authors of this Legal Update or to your Seyfarth Employee Benefits attorney if you need additional information.