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.

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Barry L. Klein
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