IRS Memorandum Limits Exceptions for Retaining Signed Retirement Plan Documents – (excuse that “my dog ate my plan documents” will not always work)
Generally, for a tax qualified retirement plan to be adopted, the plan document must be signed and dated by the sponsoring employer and retained. However, in Val Lanes Recreation Center Corp. v. Commissioner of Internal Revenue, T.C. Memo 2018-92, the Tax Court found that the employer’s failure to produce a signed plan document did not disqualify the plan.
In Val Lanes, the Tax Court held that the IRS abused its discretion in revoking a favorable determination letter finding that Val Lanes’ Employee Stock Ownership Plan (ESOP) was qualified under Internal Revenue Code (IRC) § 401(a). The IRS issued a favorable determination letter, conditioned on Val Lanes’ timely adoption of a proposed amendment to comply with Internal Revenue Code (IRC) § 414(u). Val Lanes claimed it adopted the amendment and restated the plan shortly after receiving the favorable determination letter, but it did not have a signed restated plan document. The IRS took the position that since the employer could not produce a signed plan document, the amendment was never executed and the ESOP did not meet the condition of the determination letter for qualification.
Although Val Lanes could not produce a signed plan document, the Tax Court found that it had adopted the amendments soon after receiving the favorable determination letter because of the credible explanation as to the absence of the executed copy. Val Lanes explained that flooding in the facility had caused extensive water damage, including damage to documents relating to the ESOP, and that the Department of Labor and IRS had seized documents and computers from Val Lanes’ accountant in an unrelated matter. The court also pointed to the fact that the IRS did not initially list failure to amend the plan as required by IRC § 414(u) as a basis for revocation on Form 886-A when it requested additional information during the plan audit. The court believed this suggested that evidence of adopting the amendment was provided during the audit.
On December 13, 2019 the IRS released a Chief Counsel Memorandum regarding qualified retirement plan adoption requirements and addressing “[c]oncerns . . . that taxpayers may argue that Val Lanes supports the proposition that a taxpayer may attempt to meet the taxpayer’s burden to have an executed plan document based on the production of an unsigned plan and a pattern and practice of signing documents given by an advisor.” While memorandums may not be used or cited as precedent, they are released to the public and provide insight about the IRS’s positions and opinions on certain issues, including IRS audit positions.
The Memorandum outlines the IRS’s position that due to the unusual facts and circumstances in Val Lanes, the decision should be limited to those specific facts. According to the Memorandum, the general rule that a plan document must be signed for a qualified plan to be adopted remains the same. Therefore, “it is appropriate for IRS exam agents and others to pursue plan disqualification if a signed plan document cannot be produced by the taxpayer.” Ultimately, the plan sponsor bears the burden of proof that it executed the plan document.
As outlined in the Memorandum, plan sponsors can expect IRS agents to pursue plan disqualification for failure to produce a signed plan document during an IRS examination of a plan. Therefore, employers and plan sponsors should continue properly executing plan documents and retaining records in accordance with Treas. Reg. 1.6001-1(e). However, in light of Val Lanes, there may be relief for plan sponsors that cannot produced a signed plan document in extraordinary circumstances and where there is credible evidence that the plan document was executed and signed. Unfortunately, the Memorandum does not provide any guidance about the factors the IRS will consider in determining whether a taxpayer has met its burden that it executed a plan document. If a plan sponsors discovers that it failed to adopt a required plan amendment, retroactive permission to adopt and sign the amendment or restatement of the plan is often available under the Employee Plans Compliance Resolution System (EPCRS), voluntary correction procedures.
 IRC section 414(u) was amended in 1996 to require qualified plans to include special rules for employees with “qualified military service.”
 Office of Chief Counsel, IRS, Memorandum AM 2019-002, at 3 (Dec. 9, 2019), https://www.irs.gov/pub/foia/am-2019-002.pdf.