IRS Announces Major Changes to its Determination Letter Program for Individually Designed Retirement Plans
On July 21, 2015, the Internal Revenue Service (IRS) issued Announcement 2015-19 (the Announcement), which ends the five year remedial amendment cycles for individually designed plans effective January 1, 2017. For remedial amendment cycles beginning after 2016, plan sponsors will no longer be able to apply for determination letters on their individually designed defined contribution and defined benefit plans, except for initial qualification and qualification upon termination. Effective on the Announcement date, off-cycle requests for determination letters will no longer be accepted. The IRS intends to publish additional guidance periodically, and seeks comments on the upcoming changes.
The determination letter program allows retirement plan sponsors to request an IRS determination that the “form” of a plan (but not its operation) meets the requirements for favorable tax treatment under the Internal Revenue Code (Code). A determination letter is an IRS opinion that the terms of a retirement plan satisfy the complex requirements of Section 401(a) of the Code. It is standard practice to seek a favorable determination letter for an individually designed retirement plan. Plan sponsors, auditors, fiduciaries and others customarily rely on a favorable determination letter to establish that a plan’s terms comply with Code requirements.
Under the determination letter program, the sponsor of an individually designed plan generally applies for a determination once every five years according to staggered application cycles (Cycles A to E) based on the last digit of the plan sponsor’s employer identification number (EIN).
IRS Announcement 2015-19
The Announcement leaves unchanged the current remedial amendment period, Cycle E, ending January 31, 2016 for individually designed plans sponsored by employers with EINs ending in zero or five. Also unchanged is the next remedial amendment period, Cycle A, from February 1, 2016, through January 31, 2017, for EINs ending in one or six. Sponsors of Cycle A plans may submit determination applications until January 31, 2017. The Announcement ends the five year remedial amendment cycles for individually designed plans effective January 1, 2017. The end of the remedial amendment cycles will mean that required amendments generally must be adopted on or before the extended due date for filing the plan sponsor’s tax return for the year of a plan change. However, because the rules are changing, the IRS expects that a remedial amendment period will extend at least until December 31, 2017.
The IRS and the Department of Treasury are considering ways to make it easier for sponsors to ensure that their plan documents satisfy the qualification requirements of the Code. This may include, in appropriate circumstances: (i) providing model amendments (safe harbor language), (ii) not requiring certain amendments to be adopted if they are not relevant for a particular plan (for example, because of the type of plan, employer, or benefits offered), or (iii) expanding plan sponsors’ options to document qualification requirements through “incorporation by reference.”
At a recent American Bar Association meeting, IRS officials informally discussed other possible compliance methods for plan sponsors including: (i) allowing plans sponsors to make minor changes to model amendments, (ii) making it easier to correct plan document failures under the Employee Plans Compliance Resolution System (EPCRS), and (iii) expanding the determination letter program for pre-approved plans.
In the Announcement, the IRS requests comments on the upcoming changes and specifically these issues: (i) changes to the remedial amendment period for individually designed plans, (ii) requirements for adoption of interim amendments, (iii) guidance to assist the conversion of individually designed plans to pre-approved plans and (iv) any modification of the EPCRS.
Cycle E and Cycle A plan sponsors should still submit timely determination letter requests for those plans. The Announcement on July 21, 2015, is likely just a first step, to be followed by other IRS guidance which may make it easier for plan sponsors to comply with documentary requirements. Questions and comments on the Announcement will probably be addressed later by the IRS. Plan sponsors with individually designed plans should consider the Announcement and subsequent IRS guidance in deciding on a course of action. When determination letters are no longer effective, sponsors of individually designed plans may decide to seek expert opinions that plan terms comply with Section 401(a) of the Code. Some sponsors of individually designed plans will consider transitioning those plans to a pre-approved format (Master and Prototype, or Volume Submitter), to take advantage of IRS opinion letters issued to pre-approved plans.
© 2015 McDermott Will & Emery