IRS Puts Brakes on Cyclical Determination Letter Program
In July 2015, the Internal Revenue Service (IRS) announced major changes that would be coming to its determination letter program in Announcement 2015-19. The Announcement stated that due to the need to reallocate its ever more limited budget, the IRS would eliminate the staggered five-year determination letter remedial amendment cycles for individually designed plans. Instead, individually designed plans would, except in limited circumstances, be limited to requests for determination letters on their qualified status upon the establishment of the plan and upon the termination of the plan. In addition, the IRS stated that it was considering ways to make ways to make it easier for plan sponsors to maintain a plan's qualification. They gave examples of providing model amendments and expanding options to document qualification requirements through incorporation by reference. In addition, in Notice 2016-03, the IRS also extended the period for individually designed defined contribution plans to convert to a current pre-approved plan.
The New Determination Letter Regime
On June 29, 2016, the IRS issued Revenue Procedure 2016-37, effective date of January 1, 2017, which is consistent with the prior Announcement and Notice, and which eliminates the staggered five-year remedial amendment cycle and the requirement for individually designed plans to adopt interim amendments. The IRS specified that a request for a determination letter on the qualified status of an individually designed plan is permitted when the plan is first established, when a plan is terminated, or in other circumstances that will be announced in the Internal Revenue Bulletin. The Revenue Procedure stated that the IRS will determine annually whether determination letter requests will be accepted in circumstances outside of plan establishment or termination based on factors including: significant law changes, new plan designs, the unavailability of conversion to pre-approved plans for certain plans and the IRS' case load and resources.
What an Individually Designed Plan Sponsor Should Know About Maintaining a Plan's Qualification Status Under the New Regime
The following are the salient points from the Revenue Procedure for plan sponsors:
• Effective January 1, 2017, such plans are no longer subject to the staggered five-year determination letter program;
• Determination letter requests are permitted only at initial qualification, plan termination, and under circumstances that will be announced annually in the Internal Revenue Bulletin;
• Determination letters issued on and after January 4, 2016 will no longer contain expiration dates;
• The expiration dates in determination letters issued prior to January 4, 2016 are no longer operative;
• Determination letters can continue to be relied upon in connection with plan provisions that are not affected or amended by a subsequent change in law;
• The IRS intends to issue annually (fourth quarter) a "Required Amendments List" for any changes in qualification requirements;
• The Required Amendments List published during the second calendar year preceding the submission of a determination letter request (and all prior Required Amendments and Cumulative Lists) will serve as the
basis for the document's review by the IRS; The IRS intends to issue annually an "Operational Compliance List" to assist all plan sponsors to operate plans in compliance with changes in qualification requirements;
• The remedial amendment period for any amendments specified in the Required Amendments List will be the end of the second calendar year following the year in which the amendment is listed;
• The remedial amendment period for any disqualifying provision related to an amendment to an existing plan which is not on the Required Amendments List will generally be the second calendar year following the
calendar year in which the amendment is adopted or effective, whichever is later; and
• The deadline for adoption of discretionary amendments continues to be the end of the plan year in which the amendment is operational.
What an Individually Designed Plan Sponsor Should Do About Maintaining a Plan's Qualification Status Under the New Regime
• Review the plan document annually to see if it needs to be amended pursuant to the current Required Amendments List and schedule the amendment's timely adoption within the remedial amendment period described above;
• Review plan records annually (third quarter of plan year recommended) to determine that all discretionary amendments were timely adopted;
• Conduct an annual review of the plan's operation to ensure compliance with all Operational Compliance Lists; and
• Review annually the IRS guidance regarding the circumstances in which determination letter requests are permitted for individually designed plans and consider whether they apply to your plan.
Please contact Sheila Ninneman with questions.