United States: IRS Takes First Steps Towards Revamping Qualified Plan Determination Letters

Last Updated: September 30 2015
Article by Barry L. Klein

Employee Benefits & Executive Compensation

Action Item: The IRS has taken the first steps towards what is likely to be the end of the determination letter program for individually designed qualified plans. The determination letter has been the cornerstone of compliance for more than 30 years. The end of the program will have a significant effect on how employers keep plans qualified and represent that they are qualified to third parties.

The Internal Revenue Service has announced a significant curtailment of the determination letter program for individually designed qualified retirement plans. We suspect it is the first step towards the eventual virtual elimination of the program.

The IRS's action:

  • Effective 2017, eliminates the five-year staggered submission process for individually designed plans.
  • Effective immediately, eliminates "off-cycle" submissions of individually designed plans.
  • Prospectively, curtails the determination letter program for individually designed plans to new plans and plan terminations (and certain special circumstances to be identified by the IRS in the future).

This effectively means that some individually designed plans will have already received the last determination letter until plan termination, and the remaining individually designed plans will receive that last letter over the next few years.

Background

For more than 30 years, the Internal Revenue Service has permitted employers and others who write and market plan documents to submit such documents for IRS review and approval. The IRS's program has historically been divided into two parts:

  1. Employers may seek the IRS's determination that the employer's plans are qualified in form. These plans are typically referred to as "individually designed" plans and the IRS's rulings approving them are referred to as "determination letters." The determination letter is issued to the employer.
  2. Mutual fund companies, banks, trust companies, attorneys, etc., that use "off the shelf" documents for their clients and customers may seek the IRS's review of such documents. These documents are typically referred to as "prototype" or "volume submitter," and the IRS's rulings approving them are referred to as advisory letters or opinion letters. In some cases, adopting employers of these types of documents may make changes to the plan document or select from among options within the plan document. Frequently, adopting employers of volume submitter documents will seek a determination letter for the plan as adopted.

The determination letter, advisory letter, and opinion letters have been the cornerstone of qualified plan compliance. There are literally hundreds of legal requirements that must be reflected in a qualified plan document. The letter gives the IRS's imprimatur that the plan meets those requirements. If a plan has a timely letter and is operated pursuant to the plan's terms, the IRS will never challenge the qualified status of the plan. As a result, accounting firms request the letter as part of the annual audit; record-keepers and investment managers request the letter before they will provide services in connection with the plan; sellers in corporate transactions must produce the letter as part of the due diligence process and must represent that the letter is currently effective; and the IRS's guidance for correcting operational issues is conditioned on the plan's having received a favorable determination letter. Although a determination letter is not a requirement for qualification, it has clearly been best practice to obtain one.

The laws regarding qualified plans frequently change, and such changes must be reflected in the plan document. Accordingly, the IRS letters have a limited shelf life, i.e., the period during which the employer and others may "rely" on the letter ultimately expires. Under the current procedures, the sponsors of prototype and volume submitter documents must submit the documents for IRS review every six years. The last round of submissions for all such documents was February 1, 2011, through April 2, 2012. All letters for prototype and volume submitter documents were issued on March 31, 2014, and employers who use these types of documents have to adopt the newly approved restated plans by April 30, 2016.

Until the IRS's recent announcement, sponsors of individually designed plans had to submit their plans for a new determination letter every five years according a staggered schedule:

Cycle

Last Digit of Employer EIN

Period for Next Filing

E

5 or 0

2/1/2015-1/31/2016

A

1 or 6

2/1/2016-1/31/2017

B

2 or 7

2/1/2017-1/31/2018

C

3 or 8

2/1/2018-1/31/2019

D

4 or 9

2/1/2019-1/31/2020

Effects of IRS Action

The IRS's action has the following practical effects:

  • Any individually designed plan for which an employer has applied for a determination letter and is currently under IRS review will continue to be reviewed by the IRS.
  • Cycle E plans may and should be filed before January 31, 2017.
  • Cycle A Plans may and should be filed between February 1, 2016, and January 31, 2017.
  • Employers should consider filing for determination letters upon plan termination. We do not recommend a filing in all cases.
  • Effective 2017, individually designed new plans, regardless of the employer's EIN, may and should be filed as soon as possible after adoption. A new plan is defined as a plan that has never been filed for a determination letter, or for which a determination letter has never been issued.
  • Cycle B, C, and D plans that have received or been submitted for a determination letter may not again request a determination letter until plan termination (subject to certain special circumstances not yet identified by the IRS).
  • Regardless of whether a plan is eligible for review, employers must continue to update plans to reflect new legislation and guidance, typically by the end of the year in which such legislation or guidance becomes effective. IRS model language will be more important. For discretionary amendments that are not driven by changes of legal requirements, the best practice is to amend the plan before the amendment's effective date. The IRS is exploring other timetables to keep documents compliant.
  • Adopters of pre-approved volume submitter plans may submit plans for review on or before April 30, 2016, regardless of the employer's EIN.
  • Our expectation is that the program for pre-approved plans will remain viable, and indeed employers with individually designed plans may want to consider transitioning to a pre-approved plan in order to maintain reliance on the IRS's letter.

Observations

The IRS is accepting and reviewing comments on the new guidance, and we expect that there will be some significant changes. In its present form, the guidance could result in many individually designed plans being re-stated on pre-approved prototype and volume submitter documents, which will be an expensive and time-consuming process. However, the following would be good current practice as this guidance process unfolds:

  • Work on Cycle E and Cycle A individually designed plan submissions should continue.
  • Adopters of volume submitter plans should apply for determination letters before the April 2016 deadline.
  • Any employer that is terminating a plan should consider submitting the plan for a final determination letter.
  • Every new individually designed plan that is not Cycle B, C, or D should submit for a determination letter after January 2017.
  • All plans must continue to be amended from time to time consistent with the IRS's annual cumulative list of changes in retirement plan qualification requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Barry L. Klein
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.