The IRS Revisits the Determination Letter Program for Individually Designed Plans
Last year, the Internal Revenue Service (IRS) issued Announcement 2015-19 which eliminated the five-year cycles (called “remedial amendment cycles”) for individually designed plan sponsors to seek determination letters from the IRS indicating that their plans were in documentary compliance with applicable law. This guidance provided that the determination letter applications for individually designed retirement plans (i.e., plans on documents other than pre-approved documents, such as prototype or volume submitter documents) would only be prospectively accepted for newly adopted plans, upon termination and “in certain other circumstances.” This guidance was set to become effective January 1, 2017 (although applications would continue to be accepted through January 31, 2017, for on-cycle filings made in the current Cycle A which closes on that date).
The 2015 announcement sparked concern in the retirement plan community. The periodic review and approval of plan documentation has become a cornerstone of plan governance, and a process on which many plan sponsors rely heavily to ensure their documentation is compliant such that the sponsoring employer and benefitting participants and beneficiaries can continue to enjoy the tax-qualified status of the plan. After many calls for reversal of this new policy or, alternatively, some other meaningful reprieve, informal commentary suggested that the IRS might admit “mistake” and abandon the proposed changes. The IRS then issued Revenue Procedure 2016-37 last week.
Possible Window for Submission in “Other Circumstances”
The five-year remedial amendment cycles are still gone. Effective January 1, 2017 (subject to the caveat noted above on current Cycle A), determination letters for individually designed plans will still only be allowed for initial qualification of newly adopted plans, upon plan termination and “in certain other circumstances.”
In determining what the “certain other circumstances” are that will be considered when evaluating when and whether to accept determination letter applications for certain amended plans or types of amendments in plans in certain future years, the IRS indicated that it will annually consider various factors, including the following:
significant law changes,
new approaches to plan design, and
the inability of certain types of plans to convert to pre-approved plan documents.
The IRS was quick to warn that even these factors may not rise to the level of allowing for interim determination letter requests, if the IRS’s then-current case load and resources do not permit opening a submission window. Plan sponsors will need to wait for guidance to be published in the Internal Revenue Bulletin to find out if/when they will be permitted to request determination letters for ongoing plans. As it stands, the IRS does not intend to open a special window; thus, only requests made through the currently-open Cycle A (again, with a sunset date of January 31, 2017) will be allowed.
Sponsors of individually designed plans will need to pay close attention to any special “other circumstance” windows that may be opened for determination letter applications from time to time.
Extended Remedial Amendment Period and Required Amendments List
In an attempt to remediate the new burden imposed on plan sponsors of individually designed plans, the Treasury and the IRS also intend to publish annually a “Required Amendments List”. The Required Amendments List, which the IRS indicates will be published in the fourth quarter of each year, will set forth the deadlines for a plan to be amended to adopt any interim law changes. In a welcome change, the remedial amendment period will generally be the end of the second calendar year following the year in which the list is issued unless otherwise provided on the list. For example, a plan amendment mandated by guidance issued in 2016, that becomes effective and in 2017 and that is listed on the 2017 Required Amendments List will generally need to be adopted by December 31, 2019.
Revenue Procedure 2016-37 does not modify the deadline for adopting discretionary amendments. The long-standing rule (established in Revenue Procedure 2007-44) that discretionary amendments must be adopted by the end of the plan year in which the plan amendment is operationally put into effect will still apply.
Based on the new guidance, an annual review of the Required Amendments List will become an essential task
Bonus Operational Guidance List
Somewhat surprisingly, the recent guidance also touches on operational compliance – an issue many consider distinct from documentary compliance. The IRS recognized the need for plan sponsors to operate plans in compliance with any change in qualification requirements beginning from the effective date of the change, regardless of the plan’s remedial amendment period for adopting those plan amendments. To assist employers in “achieving operational compliance”, the IRS announced that it intends to provide another annual list – the “Operational Compliance List”. The Operational Compliance List will identify changes in qualification requirements that are effective during a calendar year. Any deviations for that list will require assessment of possible correction under EPCRS.