January 16, 2020

Employers Sponsoring 401(k) Plans Must be Diligent with Plan Documents

The Memo makes clear that if an employer cannot produce a signed plan document on audit, the employer has the burden of proving that the plan was signed when required.

The Memo was issued as a reaction to the case of Val Lanes Recreation Center v. Commissioner. In Val Lanes, the employer could not produce a signed ESOP document on audit. The IRS cited previous Tax Court precedent and concluded that a failure to sign a plan document meets neither the spirit nor the letter of the law. The Tax Court previously stated that a plan communicated to the employees has no meaning if the employer lacks a written document under which the employer is contractually obligated or committed.

Despite previous precedent, the Tax Court found that the IRS had abused its discretion in revoking the qualified status of the Val Lanes ESOP. The Tax Court held a hearing and found credible evidence that the plan had been signed. The employer could show a pattern of signing all documents sent to it by its accountant. The employer had suffered flooding of its premises that resulted in the loss of documents. These facts together established for the court that a plan had been signed by the employer.

The Memo issued following Val Lanes is a warning to qualified retirement plans. The IRS considers the ruling in Val Lanes to be very factually dependent. The IRS does not believe that most employers could meet the burden met in Val Lanes. The risks are high. Disqualification results in income recognition to plan participants, a loss of previously claimed deductions by the employer and the recognition of any income on investments in the plan. Documents will need to be updated for the recent changes to retirement plan law. It is important that employers stay diligent in signing and retaining all plan documents.

Contact Liam Healy at 313-961-0200 for questions or assistance on these regulatory changes or other business needs.

Liam K. Healy of Kerr Russell practice clients maintain compliance with state and federal tax laws that govern individuals and businessesLiam Healy focuses his practice on helping clients maintain compliance with the myriad of state and federal tax laws and regulations that govern individuals and businesses. He has a broad range of experience in business law and business tax matters including choice and formation of business entities, partnership and shareholder agreements, buy sell agreements, franchise agreements, mergers and acquisitions, business succession planning, real estate, tax free exchanges, non-profit organizations and tax audits. Liam has counseled business owner clients through every stage, from formation to the sale of the business.

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