Uncertainty Surrounding the Future IRS Determination Letter Program and New Provisions
In January 2016, the Internal Revenue Service (“IRS”)issued Notice 2016-03 (the “Notice”) which expands on major changes for individually designed retirement plans. The guidance in the Notice is only applicable until Revenue Procedure 2007-44 is updated and published. Cycle E filers had until January 31, 2016, to file for determination letters while Cycle A files have until January 31, 2017.
An IRSdetermination letter allows employers to place reliance on the determination letter that their retirement plan meets the requirements under the Internal Revenue Code for favorable tax treatment. Individually designed plans were required to apply for a new letter every five years. The five year cycle was determined by the last digit of a plan sponsor’s employer identification number. In previous guidance issued by the IRS, the determination letter program is being adjusted to limit activities to initial plan qualification upon termination and other special circumstances. The new program will be in effect January 1, 2017.
The Notice provided for three main provisions:
- Controlled groups and affiliated service groups that previous made a Cycle A election are permitted to submit determination applications during February 1, 2016 through January 31, 2017. By having a more recent determination letter this will provide additional confidence that the plan’s most recent provisions meet required qualifications.
- Determination letters issued prior to January 4, 2016, expiration dates are no longer operative. Additionally, determination letters issued after this date will no longer include expiration dates. Future guidance will clarify the extent to which an employer may place reliance on a determination letter after a subsequent change in law or plan amendment.
- An extension from April 30, 2016 to 2017 for the period during which employers may establish or adopt a defined contribution pre-approved plan and if allowable apply for a determination letter. Those adopted beforehand still only have until April 30, 2016. This facilitates a plan sponsor’s ability to convert from an individually designed plan. A current defined contribution pre-approved plan is a designation for specific plans that were previously approved and included on the 2010 Cumulative List.
The following are examples from Notice 2016-03 which explains the applicable extension period based on when the defined contribution plan was adopted:
| Example 1 | Employer A currently maintains Plan X, a defined contribution individually designed plan. Employer A is considering converting Plan X into a defined contribution pre-approved plan. Employer A has until April 30, 2017, to adopt a current defined contribution pre-approved plan within the current 6-year remedial amendment cycle for defined contribution plans and to apply for a determination letter, if permissible. |
| Example 2 | Employer B establishes Plan Y, a defined contribution individually designed plan, on January 1, 2016. Employer B is considering converting Plan Y into a defined contribution pre-approved plan. Employer B has until April 30, 2017, to adopt a current defined contribution pre-approved plan within the current 6-year remedial amendment cycle for defined contribution plans and to apply for a determination letter, if permissible. |
| Example 3 | On April 1, 2010, Employer C initially adopted the defined contribution VS plan of Sponsor Z, which was approved based on the 2004 Cumulative List. On January 15, 2016, Employer C adopts the current defined contribution VS plan of Sponsor Z as a modification and restatement of Employer C’s existing defined contribution VS plan. Employer C continues to have until April 30, 2016, to apply for a determination letter, if permissible. |
| Example 4 | On April 1, 2010, Employer C initially adopted the defined contribution VS plan of Sponsor Z, which was approved based on the 2004 Cumulative List. On January 15, 2016, Employer C adopts the current defined contribution VS plan of Sponsor Y as a modification and restatement of Employer C’s existing defined contribution VS plan, instead of adopting the current defined contribution VS plan of Sponsor Z. Employer C continues to have until April 30, 2016, to apply for a determination letter, if permissible. |
Considering the uncertainly surrounding the future of the determination letter program, more plans may opt to consider adopting a pre-approved plan versus an individually designed plan which involves more scrutiny given the distinct design provisions. As a result, a pre-approved plan may appear more attractive. A downside, however, is that pre-approved plans limit flexibility when it comes to plan design. With determination letters no longer having expiration dates for individually designed plans, it will only support that at one point in time the plan met IRS requirements; however, if an individually designed plan is subject to additional amendments there is no guarantee as to its compliance. Future guidance is expected to clarify the reliance which can be placed on a determination letter following an amendment going forward. Plan sponsors may want to consider consulting with their third party administrator or ERISA counsel to ensure their plan operations, plan document, and subsequent amendments are in compliance with IRS requirements. Plan sponsors should consult with their ERISA counsel to determine the benefits and drawbacks of converting to a pre-approved plan and how this Notice impacts their Plan’s operations.
If you should have any questions related to the IRS determination letter program or would like more information, please contact us at [email protected].
The information contained herein is not necessarily all-inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.
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