As we reported earlier this year, the Internal Revenue Service (IRS) is making significant changes to its determination letter program for tax-qualified retirement plans. Last month, the IRS issued Revenue Procedure 2016-37 providing additional guidance as to how the new, more limited program will work, beginning in 2017. The guidance applies to both individually designed plans and preapproved plans (e.g., volume-submitter and prototype plans). This WorkCite focuses primarily on the impact of the new guidance on individually designed plans.
Goodbye to the Familiar Five-Year Remedial Amendment Cycle
For a number of years, the IRS has maintained a five-year staggered cycle for regular periodic review of an individually designed plan’s documentary compliance with applicable tax requirements, known as the “remedial amendment cycle.” Beginning in 2017, the five-year cycle will end. This year is the last year in which an eligible individually designed plan may be submitted for review based on the five-year cycle. Plans assigned to the current cycle (“Cycle A”) must be submitted to the IRS by Jan. 31, 2017, to be eligible to receive a determination letter under the current program.
Observation: A favorable determination letter expresses the IRS’s opinion only regarding the form of the plan document. However, to be a qualified plan under Section 401(a) of the Internal Revenue Code entitled to favorable tax treatment, a plan must satisfy, in both form and operation, the requirements of Section 401(a).
Under the new program, individually designed retirement plans will be eligible to obtain determination letters only for initial qualification (at birth), when they terminate (at death) and in certain other limited cases (as yet to be defined by the IRS). The IRS indicated that when deciding whether to issue determination letters other than in the case of initial qualification or termination, it will consider a number of factors, including significant law changes, new approaches to plan design and the inability of certain types of plans to utilize preapproved plan documents, as well as the IRS’s current caseload and available resources. A decision to allow plan sponsors to request determination letters based on such exigent circumstances will be announced in future published guidance.
For the 2017 calendar year, determination letter applications may be submitted only for plans covered by Cycle A (and only until Jan. 31, 2017), newly established plans and terminating plans.
Limited Reliance Permitted for Previously Issued Determination Letters
Under the current program, determination letters were issued with expiration dates tied to a plan’s specific five-year cycle. Beginning Jan. 4, 2016, favorable determination letters issued to individually designed plans ceased to have expiration dates and the IRS announced that expiration dates for letters issued before that date would no longer be operative.
The new guidance clarifies that letters issued under the current program may continue to be relied upon after this year for plan provisions that are not amended or affected by a change in law. However, if a plan provision is subsequently amended or if there is a subsequent change in law, the favorable letter may not be relied upon as to the amended plan provision or as to any plan provision affected by the change in law.
Remedial Amendment Periods for Individually Designed Plans
In conjunction with eliminating the five-year cycle, the IRS will no longer issue a “Cumulative List” or require the adoption of “interim amendments” by the end of a plan’s five-year cycle. Instead, the IRS will publish two separate lists on an annual basis: a “Required Amendments List” and an “Operational Compliance List.”
The “remedial amendment period” represents the period under IRS regulations during which a plan must be retroactively amended to comply with a change in qualification requirements. The Required Amendments List will be issued after Oct. 1 each year and will list all of the amendments necessary for an individually designed plan to retain its qualified plan status. In general, the deadline for adopting a required amendment will be the end of the second calendar year following the year in which the requirement is announced (with some modifications for new and governmental plans). For example, an amendment included in the 2017 Requirement Amendments List must be adopted on or before Dec. 31, 2019. An item will generally be included on the Required Amendments List only after the IRS has provided guidance for such item (including any model amendment).
While the remedial amendment period may continue for an extended duration, a plan must be operated in compliance with a change in qualification requirements from the effective date of the change regardless of whether an amendment has been adopted. Therefore, the IRS will also issue an Operational Compliance List annually to identify changes that are effective during a calendar year.
Observation: Despite the changes outlined above, the amendment deadline for discretionary amendments (i.e., amendments not related to qualification requirements) is still generally the end of the plan year in which the amendment is operationally effective.
Extension of Remedial Amendment Period During Program Transition
The remedial amendment period for certain amendments related to qualification requirements was set to expire at the end of the current five-year cycle (i.e., on Dec. 31, 2016). In connection with the elimination of the five-year cycle, the remedial amendment period for such provisions has been extended to Dec. 31, 2017. However, plan provisions required to be amended by the 2016 Required Amendments List will be subject to a remedial amendment deadline that ends on the last day of the second plan year beginning after the Required Amendments List is issued, i.e., Dec. 31, 2018.
Scope of Plan Review
When a determination letter application for an individually designed plan is submitted for one of the permitted reasons listed above, the IRS will review the plan for compliance with the Required Amendments List that was issued during the second calendar year preceding the submission of the determination letter application and all earlier Required Amendments Lists and Cumulative Lists. For example, if a plan is submitted for a determination letter during the 2019 calendar year, the IRS’s review will be based on all Required Amendments Lists and Cumulative Lists issued during or prior to 2017, regardless of the fact that the plan otherwise would not be required to be amended for items on the 2017 Required Amendment List until Dec. 31, 2019.
Generally speaking, the termination of a plan will prematurely end the plan’s remedial amendment period. Therefore, any plan amendments required to be adopted to reflect qualification requirements that apply as of the date of termination must be adopted in connection with the plan’s termination, regardless of whether such amendments have been listed on a Required Amendments List.
Preapproved plans are currently subject to a six-year remedial amendment cycle. There is one such cycle for all preapproved defined contribution plans and one cycle for all preapproved defined benefit plans. A preapproved plan generally must submit its determination letter application on or before Jan. 31 of the calendar year following the opening of its remedial amendment cycle. The IRS intends to continue to publish Cumulative Lists for these preapproved plans in December of the year preceding the year in which the determination letter application submission period begins. Once the review cycle is complete, the IRS will announce a deadline (typically, within at least a two-year window) by which adopting employers must adopt the newly approved plans.
This IRS guidance also extends the third six-year cycle for preapproved defined contribution plans for six months, so it will now begin Aug. 1, 2017, and end July 31, 2018.
Observation: An employer that amends any provision of a preapproved plan (other than certain permitted changes) loses reliance on the opinion or advisory letter issued for the plan. Such an employer may still apply for a separate determination letter covering the amended provision but only under certain limited circumstances. Therefore, employers should carefully consider whether a determination letter may be requested before making any such amendments to a preapproved plan.
While the long-term implications of this overhaul of the determination letter program remain unclear, this most recent guidance has provided more detailed information regarding the extent to which a favorable determination letter may continue to be relied upon and the timeline for required amendments. Under the new program, employers and plan sponsors will likely need to review plan documents annually to ensure compliance with the applicable Required Amendments List and to review the Operational Compliance List annually to ensure that any failures are detected and adequately corrected.