A recent U.S. Tax Court case reminds employers of the importance of keeping qualified retirement plans updated for changes in the federal tax laws. In Christy & Swan Profit Sharing Plan v. Commissioner, T.C. No. 23853-09X, T.C. Memo. 2011-62 (March 15, 2011), the court considered whether a profit-sharing plan that was not amended for changes in the federal tax law was entitled to retain its tax-qualified status.
The Christy & Swan Profit Sharing Plan was adopted in 1986 and received a favorable IRS determination letter in 1986. The IRS commenced an audit of the plan in June 2007, during which the IRS discovered that the plan was not amended to comply with the requirements of certain statutory enactments including those required by the Community Renewal Tax Relief Act of 2000 (CRA) and the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
The plan's trustee argued the plan was "amended" by general reference to incorporate all statutory and regulatory amendments necessary to retain qualified status under section 401(a), although no formal amendments were made to the plan document. The Trustee also argued that because the plan discontinued receiving contributions and barred admission of new participants in 2001, the plan ceased to exist and thereafter was not required to amend for the statutory enactments.
Court Decision and Significance
The court disagreed with these and all of the other arguments offered by the trustee. It held that because the petitioner's plan provisions were not amended to conform to statutory requirements, the IRS properly revoked the plan's tax-qualified status as a qualified profit-sharing plan under section 401(a) for 2001 and subsequent years.
This case underscores the need to keep qualified plan documents, such as 401(k) plans and profit-sharing plans, updated and timely amended for changes in the laws applicable to these plans.