When the IRS audits a retirement plan, it expects the plan sponsor to produce a plan document and amendments that have been signed by the relevant fiduciaries. Except under extraordinary circumstances, an unsigned plan document will not suffice.

The IRS recently reiterated this position in a memorandum issued by the Office of Chief Counsel. It did so out of concern that sponsors might misinterpret a Tax Court ruling in which the IRS was told it could accept some unsigned documentation, reversing a decision by the IRS to disqualify a plan whose sponsor failed to produce a signed plan document during an audit.

The case

In Val Lanes Recreation Center v. Commissioner, the employer could not produce a signed plan document as requested by the IRS during an audit. The employer instead provided an unsigned one. The IRS sought to disqualify the plan for, among other reasons, failure to produce a signed plan document or amendments.

The Tax Court concluded that the IRS was being unreasonable in failing to take into consideration the extraordinary circumstances that contributed to that plan sponsor’s inability to produce signed copies of the requested documents. In particular, the Court accepted as “credible” the plan sponsor’s testimony that:

1. A roof leak had caused flooding damage in the sponsor’s office, leading to the destruction of those (and other) documents; and
2. The sponsor’s accountant’s computers had been seized by federal agencies “in a separate matter.”

The plan sponsor’s accountant testified that “to the best of his knowledge,” the relevant documents were signed and retained by the sponsor shortly after receiving them. The individual who served as the president, treasurer and sole director of the employer also testified that under normal office procedures, he would have signed the plan document because he signed every document sent by his accountant. 

The memorandum

According to the IRS memorandum, a plan is considered adopted only if proof of adoption of the plan is provided. For a qualified plan to be validly adopted, the employer — or someone authorized by the employer — must sign the plan document. The employer or its authorized agents must also retain a signed copy of the plan document and any amendments. If the employer fails to produce an executed plan, it “has the burden to prove that it executed the plan document as required.”

The IRS memorandum clarifies that the Tax Court had made a factual determination that, though the employer was able to produce only an unsigned copy of its restated plan on audit, a plan document was validly signed and retained. The Court’s determination was primarily based on what it considered the employer’s credible testimony. The IRS reasoned the Tax Court’s ruling in Val Lanes stemmed from a very unusual set of circumstances, which would have limited applicability to other plan sponsors.

The IRS told plan sponsors, in effect, that trying to justify lacking a signed plan document simply on the basis of a “pattern and practice of signing documents given by an advisor” like an accountant does not get you off the hook. It is, therefore, “appropriate for exam agents and others to pursue plan disqualification if a signed plan document cannot be produced by the taxpayer,” the IRS concluded.

Do Not be Disqualified

Remember that the company must adopt a written plan and the benefits a plan provides must be unquestionably determinable. This ensures that companies and participants have an official resource as to what promises in regards to plan eligibility, contributions, vesting, distributions, etc.  By signing the plan document, a plan sponsor is agreeing to the terms of the plan and promises these benefits to the employees.

It is important to remember that failure to produce a signed plan document (and, if applicable, amendments) can result in plan disqualification. To prevent such a dire circumstance, review the administrative processes used by both your organization and any external service providers to ensure that your plan document is signed promptly on adoption and that any amendments are as well. Redundant document storage capabilities are also advisable.

For more information, contact Stephanie Zaleski-Braatz at [email protected] or 312.670.7444.  Visit ORBA.com to learn more about our Employee Benefit Plans Services.