IRS Determination Letter Program – It’s a New BallgameFall 2016 – Articles For Your Benefit
Last summer, the IRS announced that it intended to eliminate its determination letter program, citing budgetary constraints and unmanageable caseloads. Industry groups, plan sponsors and others protested and urged the agency to reconsider, but to no avail. On June 29, 2016, the IRS issued Revenue Procedure 2016-37, which substantially curtails the determination letter program for qualified retirement plans, most significantly with respect to individually designed plans.
Elimination of the Five-Year Remedial Amendment Cycle
To this point, individually designed plans have been subject to a five-year restatement cycle, with the specific cycle (A through E) generally determined by the last digit of the plan sponsor’s employer identification number. Every five years, then, a plan sponsor would restate its plan to incorporate all prior amendments and conform to current law, in accordance with the applicable Cumulative List of Changes in Plan Qualification issued annually by the IRS. Application would be made to the IRS for a new determination letter and the plan sponsor was permitted to rely upon that determination letter until its expiration date, corresponding with the next remedial amendment cycle.
Effective January 1, 2017, this staggered five-year remedial amendment cycle for individually designed plans will be eliminated. (The current remedial amendment Cycle A, which began on February 1, 2016, and will end on January 31, 2017, will be the last such cycle). Instead, sponsors of individually designed plans will be permitted to submit determination letter applications only on initial adoption and on plan termination. Each year, the IRS will decide whether determination letter applications will be accepted under any other circumstances. Among the factors that may be taken into consideration in making that determination are significant changes in the law, new approaches to plan design, IRS caseloads and resources available to process applications.
Interim Amendments and Compliance
In the past, “interim” amendments were required from time to time between five-year restatement cycles to conform to changes in the law. While interim amendments, per se, no longer exist, the requirement for maintaining ongoing compliance by way of amendment has not been eliminated. To assist plan sponsors and those responsible for document compliance, the IRS now intends to issue two new pieces of guidance annually, beginning in 2017: (1) a Required Amendment List; and (2) an Operational Compliance List.
The Required Amendment List will be published during the fourth quarter of each year and will detail new requirements (which may necessitate plan amendment, depending upon the features included in a particular plan), as well as the effective dates of those requirements. Plan sponsors then will have until the end of the second calendar year following the calendar year in which the required modification first appears on the Required Amendment List to adopt any needed amendment. For example, if a change appears on the 2017 Remedial Amendment List, a plan sponsor will have until the end of 2019 within which to adopt any required amendment. In the interim, the plan must be operated in compliance with the amendment as of the specified effective date and the subsequent amendment must bring the plan document into conformity with plan operation. The IRS has stated that changes in the law generally will not appear on the Required Amendment List until any anticipated guidance relating to the change has been issued. This, at least, should minimize the number of amendments needed to conform to each change in the law.
The IRS also intends to issue an Operational Compliance List each year to identify changes in qualification requirements that are effective during that calendar year. This list is intended to assist plan sponsors with operational compliance during the period of time between the effective date of a change in the law and the date by which a conforming amendment must be adopted. The IRS has cautioned, however, that the Operational Compliance List may not be relied upon as being an exhaustive list of changes; plan sponsors are required to comply with all relevant qualification requirements, even if those items are not included on the list.
Reliance on Determination Letters
Revenue Procedure 2016-6 confirms, that, effective January 4, 2016, determination letters issued to individually designed plans no longer will specify expiration dates. Further, any expiration date included in a determination letter issued prior to January 4, 2016, no longer is operative. Once a determination letter has been issued (presumably, upon initial adoption) the plan sponsor is entitled to continued reliance on that letter, subject to required modifications on the Required Amendment List and subject to any discretionary amendments the plan sponsor voluntarily chooses to make.
Effect of Revenue Procedure 2016-37 on Preapproved Plans
The effects of the revenue procedure on preapproved (prototype and volume submitter) plans are much more limited. These plans remain on a six-year remedial amendment cycle and arguably remain subject to the interim amendment requirements. However, even if no interim amendment is needed, preapproved plans must be operated in compliance with changes noted on the Operational Compliance List, with the understanding that a retroactively effective plan modification will be incorporated in the next plan restatement.
Other Consequences and Considerations
Determination letters have played an important role over the years. They have provided assurance that plan documents satisfy regulatory and governmental standards and they have served to document qualified status for plan auditors, for individual participant rollovers and in corporate mergers and acquisitions. The curtailment of the determination letter program leaves a major void in these areas.
Given all of the new requirements and additional complexities, some might ask why an individually designed plan document should be maintained. Certainly, the IRS would prefer that more plan sponsors migrate toward the adoption of preapproved prototype and volume submitter plans. Yet, many plans, of necessity, include provisions that simply do not fit onto the preapproved documents. Some plans, for example, cover multiple divisions or subsidiaries with significantly different benefit features; others are obligated to maintain carryover features from plans of acquired entities; and many plans simply wish to preserve unique provisions that have been included historically. When this type of flexibility is needed and/or desired, a preapproved plan simply may be too restrictive. Nevertheless, the cost effectiveness and relative simplicity of preapproved plans offer great appeal, which must be weighed against the flexibility afforded by an individually designed approach to determine whether the costs and demands now involved in maintaining an individually designed plan are warranted.