In Rev. Proc. 2016-37, the IRS provides guidance on the determination letter program for individually designed qualified retirement plans. The guidance sets out a framework for the pared-down program, establishes a new remedial amendment period, and explains how required amendments should be handled by plan sponsors going forward. These changes to the determination letter program are generally effective January 1, 2017.
Most large employers maintain individually designed defined benefit and/or defined contribution retirement plans. After the IRS announced its plan to curtail the determination letter program in 2015,1 industry groups and other stakeholders urged the agency to rethink its decision, but the IRS held firm.
The staggered five-year remedial amendment cycle ends as of January 1, 2017. After that, individually designed retirement plans generally may not submit restated plans to the IRS for a determination of whether the plan meets the qualification requirements in the tax code and IRS regulations every five years.2
Future determination letter program
In 2017 and beyond, the IRS will accept determination letter applications for individually designed plans in the following circumstances:
- Initial plan qualification. This includes individually designed plans submitted on Form 5300 and volume submitter plans with minor modifications submitted on Form 5307.
- Plan terminations. Determination letters for plan terminations may be submitted under the same conditions that currently apply.
- “Other” circumstances. Each year, the IRS will announce in the Internal Revenue Bulletin whether it will accept determination letter applications for amended individually designed plans. For example, the agency might allow submissions following significant changes in the law or widespread adoption of new plan designs, or for plans that are unable to convert to preapproved plan document platforms. The IRS will also consider whether its caseload and available resources allow for additional determination letters.
Interim plan amendments
Plan amendments required to comply with a change in the qualification requirements will no longer need to be adopted by the due date of the plan sponsor’s tax return for the year of the amendment’s effective date.
Instead, the IRS will publish a Required Amendments List of all amendments that must be adopted to retain the plan’s qualified status. Starting in 2017, the list will be published every year after October 1, and plan sponsors will need to adopt the required amendments by the end of the second year following the list year (unless legislation or other guidance states otherwise). The IRS intends to hold off on including required amendments in the list until related guidance and model amendments (if any) have been issued.
Discretionary amendments (e.g., plan design changes) still must be adopted by the end of the plan year in which the plan amendment takes effect.
Operational compliance and reliance on prior determination letters
The IRS has the authority to delay the due date for plan amendments, but plans must still comply with changes to the qualification requirements as of the effective date of the change. To avoid confusion, the IRS plans to provide an Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year.
Expiration dates in past determination letters are no longer operative. A sponsor of a qualified plan that has received a favorable determination letter may continue to rely on its authority unless the provision at issue is amended or affected by a change in the law. To retain such reliance, all material facts must have been disclosed at the time the determination letter request was submitted or reviewed.
The six-year determination letter cycle for sponsors of preapproved plans (master and prototype, and volume submitter) to submit restatements to the IRS and obtain favorable opinion or advisory letters generally remains intact. The period for sponsors of preapproved defined contribution plans to submit for opinion or advisory letters during the third six-year cycle for such plans opens August 1, 2017.
The IRS extended the due date for sponsors of individually designed defined contribution plans to adopt a preapproved platform from April 30, 2016, to April 30, 2017.
The elimination of cycle-based determination letter submissions is a major change. For some plan sponsors, it might be welcome, as they will no longer need to prepare determination letter applications every five years, gather amendments, prepare a restated plan and respond to IRS inquiries about the submission.
On the other hand, the new regime will present its own challenges. Sponsors still must demonstrate that they have amended their plans in a timely and compliant manner, but now in the less predictable context of an IRS examination. Differences of opinion between IRS agents and plan sponsors will inevitably arise and will have to be resolved through the IRS closing agreement program. Agents may impose monetary penalties for flaws in plan document language.
Additionally, the predictable five-year submission cycle motivated sponsors to review their plans and confirm that all necessary amendments were adopted on time. Lacking that structure and motivation, plan sponsors might be more likely to miss an amendment, possibly for some time. Such failures could incur IRS sanctions and possibly costly corrections.
Sponsors might want to implement internal processes to make sure they remain in compliance. For example, they could conduct periodic reviews, such as every year or two, of the plan document to ensure that all changes in the IRS Required Amendments List were adopted on time.
While preapproved plans may be a good choice for some sponsors, their limited menus of plan provisions will not work in every situation, and notice of a required amendment from a preapproved plan provider does not ensure timely adoption.
Plan sponsors already deal with some of these challenges in the interim amendment process that has been in place for almost a decade, and the new IRS procedures may improve the plan amendment process. This will depend, at least in part, on whether the Treasury Department and the IRS issue timely guidance on changes to the tax law that require plan amendments, and whether the IRS applies some leniency in its examinations of plan documents.