IRS Taketh and Giveth: Plan Determination Letter Program Scaled Back, Remedial Amendment Period Extended
On June 29, 2016, the Internal Revenue Service (IRS) released Revenue Procedure 2016-37, which provides guidance on:
- The scaling back of its Determination Letter Program for tax-qualified individually designed plans; and
- The elimination of required "interim" plan amendments and changes to when sponsors must adopt plan amendments for qualification purposes.
Determination letters provide confirmation that a plan document and related trust meet all applicable qualification requirements under the Internal Revenue Code. Under the current determination letter program, individually designed plans request an updated determination letter generally every five years, under what is known as the plan's "Remedial Amendment Period" or "RAP." If the statutory or regulatory qualification requirements change during the plan's RAP, an individually designed plan typically must adopt interim amendments covering such changes by the end of the year in which the amendments became effective. The IRS would then approve and finalize such interim amendments (or conforming amendments could be made as part of the determination letter application) at the end of the plan's 5-year RAP.
Determination letters are often relied upon in the context of mergers and acquisitions, financing transactions and other arrangements where parties are required to provide disclosures or covenants with respect to qualified retirement plans, as well as for administrative purposes, such as approval of rollovers between qualified plans.
Determination Letter Program Changes
Under the new determination letter program spelled out in Rev. Proc. 2016-37, beginning January 1, 2017, the 5-year RAP for individually designed plans is eliminated. The IRS will only issue determination letters for qualified plans on the adoption or termination of a plan. In the future, the IRS will identify special exceptions for issuing determination letters. However, employers covered by Cycle A (primarily sponsors with employer IDs ending in 1 or 6) may still apply for an updated determination letter through January 31, 2017. In addition, expiration dates for determination letters issued prior to January 2016 are no longer effective.
Timing of Plan Amendments
Rev. Proc. 2016-37 provides that the IRS will no longer require interim plan qualification amendments. Instead, the IRS will issue, on an annual basis, a Required Amendment List (RA List) of all the amendments which an individually designed plan must adopt to retain its qualified plan status. Generally, plan sponsors must adopt the required amendments on the RA List by the end of the second calendar year following the year the RA List is published. So plan sponsors must adopt plan amendments required under the 2016 RA List no later than December 31, 2018. Generally, plan sponsors must amend plans for discretionary amendments by the end of the plan year in which the amendment is operationally effective.
Regardless of the deadline under the new rules for adopting conforming amendments, employers still need to operate their plans in compliance with any changes to the qualification requirements from the effective date of the change. The IRS plans to issue an Operational Compliance List annually to identify such operational changes in the qualification requirements.
The same general 6-year RAP cycle rules as under the current program still apply to prototype and volume submitter plans. The guidance does provide some transition rules that extend the ability of sponsors of individually designed plans to switch to prototype or volume submitter plans by April 30, 2017.
Under the new program, while existing favorable determination letters will not expire, a sponsor cannot rely upon the determination letter with respect to plan provisions that are subsequently amended or otherwise affected by a change in law. This may require the adoption of other procedures or processes with respect to treatment of qualified plans in business deals, financings, business audits and other corporate matters, as well as for rollover of benefits and other plan administration purposes.
If you have any questions about the changes to the determination letter program and its impact on your qualified plans, please contact Doug Ellis at firstname.lastname@example.org | (412) 394-2367; Nancy Farnam at email@example.com | (248) 530-6222; Ed Hammond at firstname.lastname@example.org | (248) 988-1821; or another member of Clark Hill's Labor and Employment Practice Group.