As we reported last year, the IRS determination letter program for tax-qualified retirement plans is about to significantly change. Beginning in 2017, 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). The IRS’ current program for evaluating a plan’s compliance with tax-qualification requirements every five years according to a prescribed schedule (called “cycles”) will be eliminated.
There has been a great deal of speculation as to how the new, more limited program will work since the IRS first announced the proposed change. Last week the IRS issued guidance that provides a few answers to these questions.
- Plans on “Cycle A” will be the last group eligible to receive determination letters under the current program.
- The current program will end with Cycle A. Plans in this cycle generally are those sponsored by an employer with an EIN that ends in the number 1 or 6. In addition, employers that are part of controlled groups or affiliated service groups are eligible under the current program to make an election to have all retirement plans maintained by the employer group assigned to Cycle A (subject to certain exceptions). The next filing period for Cycle A plans begins Feb. 1, 2016, and ends Jan. 31, 2017. This will be the last period for filings under the current program.
- Plans of controlled groups and affiliated service groups will be eligible to file for determination letters during the final Cycle A filing period only if the controlled group or affiliated service group had made the required election to use Cycle A by Jan. 31, 2012 (which was the final day of the last Cycle A filing period). As a result, employers that had not previously elected to file all retirement plans maintained by the controlled group or affiliated service group under Cycle A will not be permitted to do so now.
- Determination letters will cease to have expiration dates.
- One of the hallmarks of the current determination letter program is that the letter had a specific expiration date tied to the plan’s assigned cycle. For example, a favorable determination letter issued by the IRS for a “Cycle E” plan that was submitted during the assigned cycle for such plans that began in 2011 generally will have a stated expiration date of Jan. 31, 2016. Thus, the plan must be submitted for a new determination letter on or before Jan. 31, 2016 (i.e., the last day of the current submission period for Cycle E plans), in order for the plan to continue to have a favorable IRS qualification determination after that date.
- In last week’s guidance, the IRS announced that all favorable determination letters issued after Jan. 4, 2016, will cease to have expiration dates. Furthermore, the expiration date on any favorable determination letter that was issued before then will be inoperative. The new guidance does not address to what extent a favorable determination letter can be relied upon if there is a future change in law or if the plan is amended. The IRS indicated that future guidance will address this issue.
- Extended adoption period for certain pre-approved defined contribution plans.
- To facilitate conversion to pre-approved plans by those employers who decide do so, the IRS has extended the adoption and submission deadlines for pre-approved defined contribution plans. Employers with individually designed defined contribution plans now have until April 30, 2017 (instead of April 30, 2016) to adopt such a plan and apply for a determination letter for that form of plan document.
These recent changes have near-term and long-term implications for plan sponsors. In the near term, eligible sponsors of plans assigned to Cycle E and Cycle A should take all necessary steps to obtain favorable determination letters under the current program so that those determination letters are as current as possible. As noted above, Cycle E plans must be submitted by Jan. 31, 2016, and the submission period for eligible Cycle A plans is Feb. 1, 2016, to Jan. 31, 2017. If a favorable determination letter is issued subject to adoption of any plan amendment requested by the IRS reviewer, care should be taken to timely adopt such an amendment so that the letter can take effect. The deadline for adopting such an amendment is typically 91 days after the date on which the favorable determination letter was issued.
The longer-term implications are less clear. Determining an appropriate course of action will be difficult until the IRS explains the extent to which a favorable determination letter can continue to be relied upon after there is change in applicable tax qualification requirements or an amendment to the plan. For example, transitioning an individually designed plan to an IRS pre-approved format (such as master and prototype) may not be desirable in light of the plan’s design and other characteristics. For sponsors of such plans, it may be more appropriate to take other actions, such as seeking a third-party opinion regarding the plan’s continued compliance with applicable qualification requirements. Future guidance should help each plan sponsor better determine what alternatives may be most desirable for its particular plan.