Scriveners’ Errors, Drafting Errors, Operational Failures, Retroactive Amendments, Reformations, ERISA, and the Tax Qualification of Pension Plan Trusts, Part I
Tax Management Weekly Report, Vol. 31, No. 2, p. 34, January 9, 2012
12 Pages Posted: 12 Jan 2012 Last revised: 18 Jan 2012
Date Written: January 9, 2012
There are often discrepancies between a pension plan’s governing documents and the plan’s operations, which may, become apparent from a review by an advisor to the plan or to the plan’s sponsor; a review by an advisor to a party conducting a transaction pertaining to the plan; a court decision that the plan failed to follow the plan terms, or the review of a benefit claim by a participant or beneficiary other than one following a court decision that the plan failed to follow the plan terms. Such a discrepancy if not corrected pursuant to the terms of the governing documents, is described as an operational failure by which the Internal Revenue Service (the “Service”), and often attributed to a drafting error, and under certain circumstances, may constitute a scrivener’s error. This article offers suggestions by which the Service may lessen the burden on itself and conscientious plan sponsors, while improving compliance with (1) the tax-qualification rules of Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and (2) the similar provisions of the Employee Income Security Act of 1974, as amended (“ERISA”).
First, the Service could improve the implementation of the corrections by: making the revenue procedure presenting the new Employee Plans Compliance Resolution System (“ECPRS”) more user-friendly than that for the current EPCRS; increasing the explicit role of the administrator in preparing the EPCRS compliance application and implementing the corrections; and requiring a pension plan administrator and sponsor to report on the plan’s Form 5500 whether (1) they knew of any uncorrected operational failures for benefit failure payments at the time the return was prepared, and (2) they had used in the year of the return the self-correction provisions of the EPCRS to correct any operational failures.
Second, the Service could provide more general principles, correction methods, and accompanying examples pertaining to additions of benefit improvements to plan documents, to correct operational failures by: discussing common discrepancies between plan operations and the options selected in adoption agreements for prototype plans and present approved corrective methods for such failures; holding that approved correction methods include the adoption of a retroactive amendment which (1) removes a discrepancy between the plan's governing documents and its operations; (2) complies with the qualification rules pertaining to the addition of the provision; and (3) increases 411(d)(6) benefits and/or changes non-411(d)(6) benefit provisions within the governing documents; and holding that operational failures include a plan benefit denial that is reversed by court deciding that the denial violated the terms of the governing documents, and such reversal may reveal that similar denials for all similarly situated persons, without regard to whether those persons brought similar benefit claim, also constitute operational failures; discussing why a retroactive amendment confirming a benefit entitlement or benefit-like entitlement pursuant to a court order may not fully resolve the qualification issues resulting from the order.
Third, the Service could provide determination letters with respect to all the qualification consequences of these correction methods by including in the compliance statement or closing agreement for any corrective plan amendment described above: a determination that the amendment has been timely adopted, complies with the qualification rules pertaining to the addition of the provision, and does not violate Code §§ 401(a)(4), 410(b), or 411(d)(6); and a determination for a user of pre-approved plan documents, that the amendment will not cause the plan to be individually designed; individually designed plans may not rely on future determination letters for revisions to the pre-approved plan.
Fourth, the Service could provide guidance for situations, in which plan administrators discover an operational failure as a result of a benefit claim that does not conclude with a court deciding that the denial violated the terms of the governing documents, by: holding that any retroactive change by the plan administrator in response to such a reversal of benefit claim denial that complies with the qualification rules pertaining to the implementation of the policy, does not violate Code §§ 401(a)(4) and 410(b), to increase the benefits of participants and beneficiaries for all similarly situated persons, without regard to whether they brought similar benefit claim, is an approved correction method; and including in the compliance statement, or closing agreement for such administrative policy change, a determination that the change complies with the qualification rules pertaining to the provision, and does not violate Code §§ 401(a)(4) or 410(b).
Keywords: Pension, Tax-Qualified, Compliance, ERISA, IRS, Scrivener, Operational Failures, Tax Filings, Drafting Errors, Retroactive, Equitable
JEL Classification: G23, H20, H24, H29, J32, J33, K34, K49, M52
Suggested Citation: Suggested Citation