United States: IRS Lays Out Plan For Maintaining Tax Qualification For Individually-Designed Plans After Elimination Of The Determination Letter Cycles

On June 29, 2016, the Internal Revenue Service (IRS) released Revenue Procedure 2016-37, which modifies the Determination Letter Program for tax-qualified plans and the requirements for when plan amendments must be adopted by individually-designed plans under section 401(b) of the Internal Revenue Code.

Changes to Remedial Amendment Cycles and Deadlines The Revenue Procedure confirms the IRS's decision to end the staggered 5-year remedial amendment cycle system for amending individually-designed plans and requesting determination letters of continuing tax qualification. Cycle A plans and controlled group or affiliated service group plans that made a Cycle A election prior to January 31, 2012 will still have a final opportunity to submit determination letter applications by January 31, 2017. Revenue Procedure 2016-37 provides details about the system that will then replace the 5-year remedial amendment cycle system to help individually-designed plans maintain their tax-exempt status by timely complying with changes in the law.

New Procedures for Individually-Designed Plans As previously announced, effective January 1, 2017, individually-designed plans will be permitted to submit determination letter applications only for initial plan qualification, plan termination, and in other limited circumstances to be determined ad hoc by the IRS (such as for significant law changes, new approaches to plan design, and certain types of plans that are unable to convert to pre-approved plan documents). Expiration dates on determination letters received from the IRS are no longer effective.

Individually-designed plans will continue to be required to adopt amendments to comply with law changes. The IRS intends to publish an annual "Required Amendments List" for any changes to the qualification requirements, with an extended amendment deadline of the end of the second calendar year following the year in which the List is issued. The IRS does not intend to place any amendment on the Required Amendments List until it has provided guidance and model amendments, as necessary, in the Internal Revenue Bulletin.

Despite the extended amendment deadline, the IRS confirmed that, as is currently required, operational compliance with law changes will be required for non-governmental plans in advance of the plan amendment deadline. The deadline for discretionary amendments (changes in the plan terms made by the plan sponsor for reasons other than compliance requirements) remains unchanged as the end of the plan year in which the provision is effective.

Unanswered Questions Remain Notwithstanding the elimination of the five-year determination letter cycle effective February 1, 2017, individually-designed plans will have regular obligations to amend their documents and operations for compliance. The IRS indicates that it will continue to provide guidance to plan sponsors in the form of model amendments or otherwise. However, significant questions remain unanswered for sponsors of individually-designed plans now unable to obtain an updated determination letter. For example:

  • How will plan sponsors "prove" the tax-qualified status of their plans in connection with financing arrangements, mergers and acquisitions, plan investments in collective investment funds, or insurance obligations, especially if significant plan design changes are made?
  • Will there be more pressure for sponsors of individually-designed plans to use model language or convert to a pre-approved plan document (if possible)? Alternatively, might sponsors request formal opinions of counsel on plan qualification matters?
  • Under the limited circumstances in which the IRS agrees to accept determination letter requests, will there be a rush to do so, causing further backlog at the IRS?
  • While the IRS has announced that the expiration dates in current determination letters no longer apply, how will the disregard of expiration dates affect plans' ability to participate in self-correction procedures, such as the Employee Plans Compliance Resolution System (EPCRS)? Is there a difference between an unexpired determination letter and a recent determination letter, as required in certain correction procedures?
  • How will document retention differ for plans not able to obtain a determination letter? Under the current guidance, it appears necessary to retain every amendment, restatement, and corporate action, as well as other material proving compliance with the relevant deadline.

Anyone with questions about these major changes, or how the Reed Smith's Employee Benefits Group can assist with addressing issues related to individually-designed retirement plans, should contact a member of the Reed Smith Employee Benefits Group listed below, or the Reed Smith attorney with whom you routinely work.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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