IRS revises retirement plan determination letter process
Letters will only be available to new and terminated plans
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In Rev. Proc. 2016-37, the IRS formally announced certain anticipated changes to its procedures for issuing determination letters to individually designed retirements plans (e.g., Employee Stock Ownership Plans as well as other complicated plans). In addition, the Rev. Proc. provides new guidance as to when employers that sponsor individually designed plans must adopt amendments for changes in the law, regulations or other guidance.
With respect to a qualified plan, a determination letter is a ruling by the IRS that the form of the plan document (but not the operation of the plan) meets the requirements to be a tax-qualified retirement plan. Among other differences, tax-qualified status provides certain tax deduction advantages to the employer and tax deferral benefits to plan participants. Therefore, employers generally want some form of assurance that the retirement plans they sponsor are tax-qualified. If the plan is a straightforward arrangement, as some 401(k) plans are, the employer can adopt an IRS pre-approved plan document. However, many plans are too complex to fit within the parameters of the IRS pre-approval program; the IRS refers to those plans as individually designed plans. Typically, plans would apply for a determination letter upon implementation, periodically on a five-year remedial amendment cycle, and upon plan termination in which the IRS would issue a final determination letter.
Determination letter changes
Under the prior five-year remedial amendment cycle process, employers that sponsored individually designed plans would update their plan document and apply for an individual determination letter according to a fixed, periodic schedule. Effective Jan. 1, 2017, the new revenue procedure limits the times that a plan sponsor can request a determination letter to the following situations:
- The plan has never received a letter before
- The plan is terminating
- The IRS makes a special exception
The IRS does not anticipate issuing any special exceptions to this process unless there is a demonstrated need for rulings in a particular area and the IRS has the capacity to review additional applications.
New remedial amendment process
Remedial amendments are amendments that a plan sponsor adopts to reflect changes in the law or other applicable guidance with respect to tax-qualified plans. Under the new guidance, the IRS will require employers that sponsor individually designed plans to update their plan documents in accordance with a Required Amendment List. The list will be an annual list of all the amendments that the employer must adopt to retain the plan’s tax-qualified status. The IRS intends to publish the Remedial Amendment List after Oct. 1 of each year. In general, the due date for employers to adopt the amendments will be the end of the second calendar year following the year in which the IRS adds the required amendment item to the list. For example, employers must generally adopt amendments for items on the 2016 Remedial Amendment List by Dec. 31, 2018.
An employer must adopt any discretionary amendments (e.g., changes to when employees become eligible to participate) by the end of the plan year in which the plan amendment is operationally put into effect.
The revenue procedure does not change applicable operational compliance standards. Employers need to operate their plans in compliance with any change in qualification requirements from the effective date of the change, regardless of the plan’s period for adopting formal amendments. In this regard, the IRS intends to publish an annual Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year.
Changes to preapproved plan process
Employers that adopt IRS preapproved plans generally have a regular, six-year remedial amendment cycle. Under this process, preapproved plan sponsors such as law firms, banks, insurers, etc., update their plans and receive either a new opinion or advisory letter from the IRS once every six years. Once the preapproved plan sponsors receive their letter, their clients have a two-year period to adopt the updated plan document set. For example, the most recent two-year period for employers to adopt amended preapproved defined contribution plans ended on April 30, 2016. Employers that adopt a preapproved plan generally may rely on the opinion or advisory letter issued by the IRS to the preapproved plan sponsor. However, in certain cases, such an employer may apply for an IRS determination letter with respect to its adoption of the preapproved plan.
The IRS anticipates that many employers that currently sponsor individually designed defined contribution plans will consider adopting a preapproved plan. Therefore, with respect to employers who currently sponsor an individually designed defined contribution plan, the IRS has extended the due date to adopt a preapproved defined contribution plan and apply for a determination letter (if permissible) from April 30, 2016, to April 30, 2017.
For example, ABC Corporation (a sponsor of an individually designed 401(k) plan) could review its plans to see if the terms of the plan fit within the parameters of an IRS preapproved plan document. If the answer is yes, ABC Corporation could adopt the preapproved plan by April 30, 2017, and still have the same degree of reliance on that plan’s preapproved status as if ABC had adopted the plan on April 30, 2016. Without following this process, ABC Corporation’s individually designed plan will not receive another determination letter approving its tax-qualified status until the plan terminates, which leaves a greater amount of uncertainty than the current environment with periodic determination letters.