IRS to End Determination Letters for Qualified Retirement Plans



Some employers may decide to switch to plans pre-approved by the IRS

By Allison P. Tanner and Maria P. Rasmussen, © McGuireWoods Jul 29, 2015
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In Announcement 2015-19, issued on July 21, 2015, the Internal Revenue Service said it is eliminating the staggered five-year determination letter (DL) remedial amendment cycles for individually designed tax-qualified retirement plans effective Jan. 1, 2017.

DLs for individually designed plans will thereafter be available only as to initial plan qualification or the plan’s qualification upon termination, and under certain other “limited circumstances” that the Department of the Treasury and the IRS may allow in the future. The stated reason for this significant change in policy is that it is needed to allow the IRS “to more efficiently direct its limited resources.”

Background

The DL program allows an employer that sponsors an individually designed tax-qualified retirement plan to apply to the IRS for written confirmation that the plan meets certain requirements of the Internal Revenue Code in form. While an employer is not required to obtain a DL for an individually-designed plan, DLs are regularly requested so that an employer can have comfort that the form of the plan will not prevent the plan from being eligible for the significant tax benefits associated with tax-qualified status, such as (i) current deductibility of employer contributions to the plan, (ii) deferral of income tax on contributions and plan earnings until distribution and (iii) the ability for participants and beneficiaries to further defer tax by rolling over an “eligible rollover distribution” to an individual retirement account or another tax-qualified plan. A favorable DL for a plan also serves other more technical purposes, such as permitting the plan to utilize certain IRS-sponsored correction programs and offering proof to other employer plans that the plan is eligible to accept rollover contributions.

For a plan and its related trust to have favorable tax treatment, they must satisfy applicable requirements of the Code in operation as well as in form. For example, a plan that has received a favorable DL would be at risk of not qualifying for favorable tax treatment if it did not properly apply applicable nondiscrimination requirements, or comply with applicable limits on plan benefits and contributions.

Currently, under Revenue Procedure 2007-44, a sponsor of an individually designed plan can submit a DL application once every five years under a staggered system of five-year remedial amendment cycles (Cycles A to E). In general, a plan’s cycle is determined based on the last digit of the sponsoring employer’s identification number. The plan’s DL application generally must be submitted within the 12-month period ending on Jan. 31 of the last year of the applicable cycle. A favorable DL generally expires when its next amendment cycle ends.

Upcoming Elimination of Five-Year Remedial Amendment Cycles

The Announcement confirms that the IRS is eliminating the staggered system of five-year remedial amendment cycles effective Jan. 1, 2017. A sponsor of an individually designed plan will thereafter be permitted to submit a DL application only (i) on initial plan qualification (i.e., for a plan that has never received a determination letter), (ii) for confirming the continued qualification of the plan in connection with its termination and (iii) under certain other “limited circumstances” as may be permitted by the IRS and the Treasury in the future.

Despite this impending change, sponsors of plans that are eligible to be submitted during the remedial amendment period cycle beginning Feb. 1, 2016 and ending Jan. 31, 2017 (i.e., Cycle A) may still submit a determination letter application during that cycle. Plans assigned to any later cycles will no longer be eligible to request a DL except in the specific circumstances noted above.

Immediate Elimination of Off-Cycle Determination Letter Applications

Although the elimination of the five-year remedial amendment cycles is not effective until 2017, the Announcement also indicates that, effective July 21, 2015, the IRS will no longer accept a DL application for a plan submitted “off-cycle,” i.e., outside of the 12-month period at the end of the plan’s remedial amendment cycle, except for DL applications for new plans and terminating plans (as described above).

Changes to Remedial Amendment Period

Section 1.401(b)-1(d) of the Treasury Regulations has long provided for a “remedial amendment period” (RAP) during which a plan with a “disqualifying provision” can be retroactively amended to satisfy Code requirements. The end of the RAP under the regulations depends on the nature of the disqualifying provision. When the IRS reviews a DL application, it will sometimes require one or more plan amendments to eliminate disqualifying provisions and will condition the DL on the timely adoption of such amendments. If the application had been submitted before the end of the plan’s RAP, the regulations provide for an extension of the RAP until at least 91 days after the issuance of the DL, thus giving the employer sufficient time to adopt the amendments.

When the IRS introduced the five-year DL remedial amendment cycles in Revenue Procedure 2007-44, it also extended the RAP for a plan, beyond the normal provisions in the regulations, until the end of the plan’s applicable remedial amendment cycle. This means that if a DL application were submitted before the end of this extended RAP, there would then be a further extension of the RAP until at least 91 days after the issuance of the DL, should the employer need to adopt any plan amendments referenced in the DL.

The Announcement indicates that as a result of the elimination of the five-year remedial amendment cycles, the extension of the RAP in Revenue Procedure 2007-44 will not be available after December 31, 2016. Instead, the end of the RAP will again be determined only under the regulations, except that the IRS intends to extend the RAP for individually designed plans to a date that is expected to end no earlier than December 31, 2017.

Other Potential Changes and Request for Comments

The Announcement also states that the IRS is currently considering ways to make it easier for plan sponsors to comply with the Code’s plan document qualification requirements. This may include, in appropriate circumstances, (i) providing model amendments, (ii) not requiring adoption of certain plan provisions if they are not relevant to a particular plan and (iii) expanding plan sponsors’ options to document qualification requirements through incorporation by reference.

The IRS has requested that comments be submitted in writing on or before Oct. 1, 2015 on a variety of issues associated with these changes, such as (i) changes to the remedial amendment period, (ii) revisions of the current interim amendment requirements, (iii) assistance to plan sponsors in converting from individually designed plans to pre-approved plans and (iv) changes to other IRS programs to facilitate the changes described in the Announcement.

For many sponsors of individually designed plans, however, a greater concern will be when DLs can be requested in circumstances other than new plans or plan terminations. These circumstances would include, for example, when an unusual plan design is under consideration or when a qualified plan is significantly impacted by a major business transaction. The Announcement states that comments from the public will periodically be sought as to other circumstances when a plan sponsor will be eligible to apply for a DL.

Observations

The curtailed DL program will have a number of significant consequences, including the following:

Some employers with individually designed plans may decide to switch to plans that are pre-approved by the IRS (such as prototype and volume-submitter plans). However, because these plans typically limit design choices and thereby are not as flexible as individually designed plans, they may be unsuitable for large employers whose plans have complex benefit schedules for different employee groups.

Auditors, and investment managers and others who rely on a qualified plan’s tax-qualified status, typically require representations from management that plans are “in compliance,” in addition to requiring a copy of a favorable DL. Once such a DL is no longer available as to the current version of a plan, the plan sponsor may seek other ways of obtaining comfort that the form of its plan complies with the Code, such as requesting an opinion of counsel.

In the mergers-and-acquisitions contest, sellers may need to use even greater caution in determining what representations and warranties they could make regarding the tax-qualified status of an individually-designed retirement plan. Similarly, purchasers may need to engage in greater due diligence as to the seller’s qualified plans.

Allison P. Tanner and Maria P. Rasmussen are members of the McGuireWoods employee benefits team. With approximately 900 lawyers and 18 offices worldwide, McGuireWoods serves public, private, government and nonprofit clients. © 2015 McGuireWoods LLP. Republished with permission. All rights reserved. This article should not be construed as legal advice.

Related Resources:

Well, They've Done It: The IRS Jettisons the FDL Program, Ferenczy Benefits Law Center LLP, July 2015

IRS Eliminates 5-Year Determination Letter Remedial Amendment Cycles for Individually Designed Plans, Findley Davies, July 2015

No More Determination Letters? What's a Plan Sponsor to Do?, Osler, Hoskin & Harcourt LLP, July 2015

Related SHRM Articles:

DOL Warns of Widespread Deficiencies in Benefit Plan Audits, SHRM Online Benefits, June 2015

Render Retirement Plan Audits Painless, SHRM Online Benefits, April 2013

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