Required Plan Amendment Compliance Tracking Procedure for Individually Designed Retirement Plans
Background (Effective elimination of determination letter process)
In Revenue Procedure 2016-37 the IRS eliminated the determination letter process for individually designed plans for all situations except initial plan qualification, qualification upon plan termination, and a few other special circumstances such as a plan merger in the event of a merger or acquisition involving unrelated entities. Prior to that time, plan sponsors could obtain a periodic “blessing” from the IRS as to the qualified status of their plan document and these “determination letters” could be shown to auditors and other interested third parties demonstrating the plan’s continued compliance with required amendments. Once the IRS ended this process, they substituted a new “self-help” procedure that left employers on their own for demonstrating compliance with these requirements.
New ‘Self-Help’ Compliance Procedure
Under this new procedure, the IRS:
(1) issues a “required amendment notice” each year (at the very end of the year) listing the amendments that were required to be made that year;
(2) establishes a remedial amendment period extending to the end of the second calendar year following the year of the required amendment (i.e., the plan sponsor could permissibly amend the plan retroactively within that period to include the required amendment for the year in question);1 and
(3) updates annually (usually in the Spring of each year) an “operational compliance list” that identifies changes in qualification requirements that are effective during a calendar year.
Plan Sponsor Use of ‘Self-Help’ Procedure
Faced with the need to demonstrate compliance with required amendments to auditors and other third parties on an ongoing basis, some employers have adopted a procedure, which uses the “self-help” resources established by the IRS in Revenue Procedure 2016-37 as follows. Each year, when the required amendments notice is provided by the IRS (usually in December of the year), the plan administrator for the plan will compare the list of required amendments against the plan for which it is responsible and will also review the current updated operational compliance list on the IRS website against the plan's operation. Any amendments that need to be made as a result of the required amendments list or the operational compliance list will then be approved by the plan administrator or plan sponsor (whoever has amendment authority under the plan in question) during that year and be finished within the applicable remedial amendment period. This action is then certified by the plan administrator in writing (whether the plan administrator is a committee taking minutes or an individual making a memo) and this process is repeated each year so that after a period of years, the plan administrator has a collection of resolutions or written memos reflecting the review of the required amendments notice for the particular year and the corresponding operational compliance list from the IRS and a notation that either amendments were required and made or that no amendments were required for the year in question. This collection of certifications can then be shown to auditors and other interested third parties and to the IRS in the event of an audit or ultimate submission for a determination letter upon plan termination. This is more work/responsibility for the plan administrator than the old process of obtaining a periodic determination letter from the IRS, but it is the procedure that the IRS has made available and it was one which many plan administrators and plan sponsors follow to help maintain the qualified status of their individually designed retirement plans.
How You Can Start Documenting Use of the IRS’ ‘Self-Help’ Compliance Procedure
If you want to get started with such a process, you can begin now with the 2020 plan year by reviewing your plan against IRS Notice 2020-83 and the current updated Operational Compliance List and documenting the results. Then, for the 2021 plan year, the IRS required amendments list should be published within the next several weeks and you can use that notice (together with reviewing the updated IRS operation compliance list in the spring of next year) to review your plan, take any amendment actions, and document your process for the 2021 plan year. Following this process, you should be able to take any required action and document 2021 plan year compliance by June or July of next year.
1 For example, in IRS Notice 2020-83 (issued on 11/20/2020) the IRS listed the required amendments for 2020 and gave plan sponsors until December 31, 2022 to adopt them. During this remedial amendment period, the plan still had to be operated in compliance with the required provision. In most instances, these changes are fairly technical and have little bearing on how benefits are calculated for any particular participant.