IRS Opens New Determination Letter System

On August 26, the IRS issued Revenue Procedure 2005-66 , establishing a new determination letter system for individual designed and pre-approved plans. This Revenue Procedure represents the culmination of a process in which the IRS considered a number of alternatives to the current determination letter system, which many felt resulted in times of "peak demand" followed by less active periods. As anticipated, the new system attempts to even out the process by providing staggered five-year submission cycles for individually designed plans and six-year submission cycles for pre-approved plans.

The Internal Revenue Code and applicable regulations provide that a plan will be considered disqualified if it is not amended within its "remedial amendment period" to correct any provisions that do not comply with the law. Generally, a plan’s remedial amendment period begins with earlier of the effective date or adoption date of the potentially disqualifying amendment and ends with the due date (including extensions) for filing the employer’s tax return for the year in which the amendment is adopted or effective (whichever is later).

If a determination letter submission is made before the end of the remedial amendment period, however, the remedial amendment period is extended until after the determination letter is issued. Accordingly, if the determination letter submission is made before the end of the relevant remedial amendment period, the sponsor can make any retroactive amendments to the plan that the IRS requires to ensure that the plan meets the qualification requirements. If, however, the submission is made after the end of the remedial amendment period, the plan could be disqualified if the IRS finds that the amendment violates the law.

When significant changes are made in applicable law, the IRS typically extends the remedial amendment period by a number of years to allow time for the IRS to issue guidance and for plan sponsors to determine how they want their plans to operate under the new law. Although the IRS would often accept determination letter applications well before the end of the remedial amendment period, there were often circumstances (such as multiple pieces of new legislation requiring plan changes) that motivated sponsors to delay amending their plans. As a result, plans sometimes remained unamended for as long as five to ten years after the relevant law change, thereby creating long periods of uncertainty for plan sponsors, possibly requiring retroactive changes in plan operations, and causing processing delays once determination letter submissions were made.

Under the new Revenue Procedure, each individually designed plan will be assigned a five-year remedial amendment cycle based on the plan sponsor’s taxpayer identification number. There will be five different remedial amendment cycles, each one year apart. The first cycle begins February 1, 2006. If the employer applies for a determination letter in the 12 months preceding the end of the applicable cycle, the employer will not need to make another submission until the end of the next five-year cycle. The following chart shows the first and second remedial amendment cycles for the five groups of plans:

Special rules for determining an employer’s TIN are described below.

Under the new system, a plan’s remedial amendment period for all law changes, IRS guidance, and other plan changes is extended to end, in most circumstances, at the close of the remedial amendment cycle in which the law change, IRS guidance, or other plan change occurs. For example, for individually designed plans, the remedial amendment period for EGTRRA and plan changes made after December 31, 2001 ends at the close of the first remedial amendment cycle shown in the chart above.

The IRS intends to issue a cumulative list of changes in plan qualification requirements each year towards the end of the year. If the change is included in the list that is issued before the 12-month period ending with the close of the applicable remedial amendment cycle, the remedial amendment period for the change will end at the close of that cycle. Otherwise, the remedial amendment period for that change will be at the end of the following cycle. Thus, a determination letter will only apply to the changes that are on the applicable IRS cumulative list. For example, assume a pension reform bill is enacted in 2007, and the IRS does not include any changes required by the new law in its cumulative list issued in late 2007. In that case, the law changes will not covered in a determination letter for plans on Cycle B (ending January 31, 2008) and Cycle C (ending January 31, 2009), and these plans will have a remedial amendment period for those law changes that ends with the close of their next remedial amendment cycle (ending on January 31, 2013 and 2014, respectively).

The remedial amendment period extensions described above apply only if the plan sponsor makes a good faith, timely-adopted interim amendment (or reasonably and in good faith determines that no amendment is necessary). In the case of a change in law or IRS guidance changing other requirements that would disqualify the plan, an interim amendment is timely-adopted if, in general, it is adopted by the due date (including extensions) for filing the employer’s tax return for the year in which the change is effective. (Plans with non-calendar-year plan years may be amended by the end of the plan year for which the change becomes effective, if later than the tax return filing deadline.) In the case of any other plan amendment, referred to in the Revenue Procedure as a "discretionary amendment," the amendment is timely-adopted if it is adopted by the end of the plan year in which it is effective.

The extension of the remedial amendment period is also conditioned on the plan’s being operated in compliance with the change in law or other change in qualification requirements for the entire period since the change was effective.

An employer is permitted to make a determination letter submission at any time within the five-year remedial amendment cycle. If, however, a submission is made at any time other than during the 12-month period preceding the end of the applicable cycle (an "off-cycle" submission), the plan will still have to make an "on-cycle" submission for any law or other changes that occur after the off-cycle submission to ensure full reliance on its determination letter. Plan sponsors will, therefore, generally want to make only on-cycle submissions (i.e., submissions in the final 12-months of each five-year cycle). Of course, if a sponsor makes a significant plan design change before the last year of its remedial amendment cycle, the comfort provided by the off-cycle determination letter may be well worth the additional effort.

The Revenue Procedure provides special rules for determining the applicable TIN, and therefore the applicable remedial amendment cycles, for plans maintained by more than one employer and circumstances in which more than one plan is maintained by a controlled group of companies. They are as follows:

• For a multiemployer plan, the plan uses Cycle D.
• For a multiple employer plan, the plan uses Cycle B.
• For a governmental plan, the plan uses Cycle C.
• For a plan maintained by multiple members of a controlled group, the plan uses the TIN used on the Form 5500 for the plan.

In addition, notwithstanding the rules above, if more than one plan is maintained by members of a controlled group, the employers may jointly elect to use Cycle A. Also, if more than one plan is maintained by members of a parent-subsidiary controlled group, the parent can elect to determine the remedial amendment cycle for the plans based on the parent’s TIN. Any election must be made by the end of the earliest cycle that would otherwise be applicable and may only be revoked in limited circumstances.

Rules similar to those described above apply to pre-approved plans, although instead of staggered five-year remedial amendment cycles, pre-approved plans are subject to two six-year cycles – one for all defined contribution plans and one for all defined benefit plans. The six-year cycle for all pre-approved defined contribution plans has already commenced, and sponsors and practitioners have until January 31, 2006 to make their submissions for EGTRRA and other recent changes. The initial six-year cycle for defined benefit plans begins on February 1, 2007, and EGTRRA applications are due by January 31, 2008 or October 31, 2007 depending on the type of pre-approved plan.

The IRS intends to process all pre-approved defined contribution plan applications at the same time and issue advisory and opinion letters approximately two years after the application deadline. All employers would then be required to adopt the amended plans in the same time frame. The IRS would then start processing the pre-approved defined benefit plan applications. As with individually designed plans, off-cycle filings are permitted, but they do not start a new cycle, so the sponsor or practitioner would have to resubmit for another advisory or option letter at the end of the applicable cycle.

© 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved.

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