Oct 1, 2015
The Internal Revenue Service determination letter program for individually designed qualified plans
enables sponsors to obtain assurance from the IRS that the plan as drafted meets the requirements of the Internal Revenue Code of 1986, as amended (the “Code”). Sponsors receiving a favorable letter are able to rely on the letter as a defense in subsequent audits as long as the plan is administered in accordance with the plan document that was submitted to the IRS. Receipt of a favorable letter has also been required to take advantage of certain corrections under the IRS Employee Plans Compliance Resolution Program.
Under current procedures, employers may seek updated determination letters every five years (“on-cycle” applications) to ensure plan documents continue to comply with changes in the law and to preserve reliance on prior determination letters. Sponsors also have the ability under current procedures to seek “off cycle” determination letters for discretionary amendments where review in advance of the “on cycle” year is considered prudent. Sponsors that seek “on cycle” determination letters are allowed to retroactively correct document failures if required interim amendments were adopted timely or were deemed unnecessary.
In IRS Announcement 2015-19, the IRS announced it is making changes to its determination letter program. Those changes are described below.
Immediate Elimination of Off-Cycle Determination Letter Applications
Effective July 21, 2015, through December 31, 2016, the IRS will no longer accept off-cycle determination letter applications, as defined in section 14 of Rev. Proc. 2007-44, except for determination letter applications for “new plans” and terminating plans. A “new plan” is a plan that applies for a determination letter before the later of (i) the end of the plan year in which it was initially adopted or (ii) the due date for filing the employer’s tax return for that year that includes the date the plan was initially adopted.
Elimination of Five-Year Remedial Amendment Cycle and Restrictions on Seeking Determination Letters
Effective January 1, 2017, the staggered five-year cycles for obtaining review of individually designed plans will be eliminated; however, sponsors of Cycle A plans, described in section 9.03 of Rev. Proc. 2007-44, will continue to be permitted to submit determination letter applications during the period beginning February 1, 2016, and ending January 31, 2017.
Also, effective January 1, 2017, sponsors of individually designed plans may no longer seek determination letters other than on initial plan qualification (i.e., for plans that have never received a determination letter regardless of when the plan was adopted) and upon plan termination.
In addition, a sponsor will be permitted to submit a determination letter application in certain other limited circumstances that will be determined by Treasury and the IRS. It is not clear from the Notice what those circumstances might be.
Transitional Extension of Remedial Amendment Period
Because the five-year remedial amendment cycle is being eliminated, sponsors will no longer have a five-year extended period to update plan documents for changes in the law or administrative guidance. Instead, the more limited period for adopting plan amendments that is set forth in IRS regulations will apply after December 31, 2016. However, the Commissioner intends to establish a transitional remedial amendment period for individually designed plans to a date that is expected to end no earlier than December 31, 2017.
IRS has stated that the change reflects budget constraints and the need to direct available resources to other priorities. IRS is seeking comments from employers and qualified plan providers for ways to amend qualified plans after the initial determination letter is issued that would simplify the amendment process without requiring ongoing applications. These include model amendments and expanding the ability to incorporate applicable Internal Revenue Code sections and regulations by reference. Sponsors may wish to consider transitioning their individually-designed plans to pre-approved documents, as those documents will continue to be reviewed by the IRS every six years for compliance with law changes.
The Notice does not address how customized amendments to a plan would be handled. For example, if a 401(k) plan adds a match or KSOP feature, the initial determination letter upon establishment of the plan would provide assurances with respect to the 401(k) features but not the enhanced benefits. Unless the IRS is proposing model amendments for common plan designs which sponsors must adopt verbatim, (in other words, a pre-approved plan similar to a prototype) it would seem the sponsor will now assume the risk that amendments do not adversely impact the plan’s qualified status, given that the amendment cannot now be reviewed by IRS until the plan terminates.
The implementation of the new policy will raise additional questions that will be addressed in future guidance from IRS. The Newport Group will be following these developments and will provide updates as appropriate.