On July 21, 2015, the Internal Revenue Service announced significant changes to the determination letter program for qualified retirement plans. The IRS, in Announcement 2015-19, made it official that it will be ending its long-standing practice of issuing determination letters for individually-designed qualified plans, except in the case of a plan’s initial determination letter, or upon a plan termination.
This change is effective immediately with respect to “off-cycle” determination letter applications, and is effective January 1, 2017 for all other determination letter applications. In other words, the IRS will still issue determination letters for individually-designed plans that are in “Cycle E” (plans sponsored by employers whose EIN ends in 0 or 5), provided the application is submitted no later than January 31, 2016, and for individually-designed plans that are in “Cycle A” (plans sponsored by employers whose EIN ends in 1 or 6), provided the application is submitted no earlier than February 1, 2016 and no later than December 31, 2016. In addition, the IRS will continue to issue determination letters for individually-designed plans upon their initial qualification, or upon their termination.
Prior to this announcement, in order to rely on the protections afforded by a favorable determination letter, individually-designed qualified plans generally were required to be restated and submitted to the IRS for a new determination letter every five years, based on changes made to the determination letter program back in 2007. However, that program of 5-year remedial amendment cycles will be essentially ended as a result of the most recent announcement. It should be noted, however, that this announcement does not make any direct changes to the determination letter program with respect to qualified plans that are in the form of a pre-approved plan. Those plans still are subject to the rules under Revenue Procedure 2007-44. As such, those plans are generally required to be restated according to a 6-year cycle, with the current 6-year cycle running from May 1, 2014 – April 30, 2016.
There are a number of outstanding issues that still need to be addressed by the IRS regarding this announcement. Chief among them is how to determine the remedial amendment period for individually-designed plans after December 31, 2016, and how these changes affect the rules under other IRS programs, including the Employee Plans Compliance Resolution Program. The IRS is requesting comments on these issues and will issue further guidance at a later date.
Takeaway: As a result of the changes announced by the IRS to its determination letter program, plan sponsors should no longer submit an application for a determination letter for an individually-designed plan, unless it is for the plan’s initial qualification, the plan’s termination, or the “on-cycle” submission for a Cycle E or Cycle A plan. In addition, sponsors of individually-designed plans may want to consider moving the plan to a pre-approved plan, especially since the IRS recently began allowing certain defined benefit pension plans and employee stock ownership plans to be adopted in the form of a pre-approved plan.