Determination Letter Rationing: IRS Reveals the Brave New World

By By Raymond P. Turner © Jackson Lewis P.C. Jul 21, 2016

​Last year's announcement by the Internal Revenue Service (IRS) of the elimination of the current five-year remedial amendment cycle system for determination letter approval of restated individually designed qualified retirement plan documents provoked bitter criticism and calls to reverse course. The Service cited budget constraints allowing a median time of only three hours of agent review per plan for the necessity of severely restricting the issuance of letters.

Even if it was partly a cry for help, they weren't bluffing. Revenue Procedure 2016-37, issued June 29, confirms that, generally effective Jan. 1, 2017, sponsors of an individually designed plan can get a determination letter only (1) upon initial plan qualification, (2) at plan termination and (3) in other circumstances including, e.g., "significant law changes, new approaches to plan design and the inability of certain types of plans to convert to pre-approved plan documents." The existing "interim amendments" requirements are going away. Ongoing Cycle A submissions will be the last under existing procedures.

An annually published "Required Amendments List (RAL)" will contain descriptions of required amendments that must generally be made by the end of the second calendar year following the year in which the RAL is issued. The IRS assures that a document qualification change will not normally appear in the RAL until guidance with respect to the change, including any model amendments the Service decides to produce, have been promulgated. The first RAL will mainly apply to document qualification changes first effective during the 2016 calendar year.

A New Regime

A favorable IRS determination letter is a kind of document "qualification insurance" for an employer-sponsor. Curtailing the availability of such letters will significantly complicate plan administration, the making of both required and discretionary plan amendments, due diligence in merger and acquisition transactions and, in general, the tax and Employee Retirement Income Security Act (ERISA) exposure in the maintenance of qualified plans.

The advice and opinions of benefit counsel and other plan advisors will likely become more important than it is already. Historically, benefits attorneys have not, as a rule, issued opinions on the qualified status of plan documents because of the availability of periodically updated favorable determination letters, together with liberal remedial amendment periods for required changes. Under the new regime we can expect that tax and legal issues over proposed plan language will loom larger than before, including cases where model plan amendment language must be adapted to certain plans. Discretionary amendments that do not fit into any model language will give rise to even greater uncertainties.

Of course, beyond budget constraints, the IRS would like to move even more plan sponsors toward the adoption of pre-approved prototype and volume submitter plans. And the new revenue procedure continues those programs with certain modifications. The benefits industry should adapt to the new restricted determination letter world by providing ever more flexible pre-approved documents.

Raymond P. Turner is Of Counsel in the Dallas office of Jackson Lewis P.C. © 2016 Jackson Lewis P.C. All rights reserved. Reposted with permission. Hyperlinks added by SHRM Online.

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