On July 21, 2015, the Internal Revenue Service (“IRS”) released Announcement 2015-19, which significantly limits the circumstances under which the IRS will accept determination letter applications for individually designed retirement plans.
Currently, individually designed retirement plans are subject to a five-year determination letter cycle, which is generally based on the last digit of the plan sponsor’s Employer Identification Number (“EIN”). To be “on-cycle,” a determination letter application must be filed in the last 12 months of the applicable cycle. A determination letter filed at any other time would be “off-cycle.”
Announcement 2015-19 provides that:
- Effective immediately, the IRS will no longer accept determination letter applications submitted off-cycle, except for initial plan qualification and qualification upon plan termination
- Starting January 1, 2017, the determination letter program for individually designed plans will generally be limited to initial plan qualification and qualification upon plan termination only. However, determination letter applications for Cycle E plans (generally EINs ending in “5” or “0”) should still be submitted by January 31, 2016, and determination letter applications for Cycle A1 plans (generally EINs ending in “1” or “6”) may still be submitted between February 1, 2016, and January 31, 2017.
The IRS cited the need to direct its limited resources more efficiently as the driving force for these changes.
Under the current determination letter process, a plan sponsor may correct certain errors discovered by the IRS during its review of the application by submitting proposed corrective amendments. These amendments must be formally adopted within 91 days of the issuance of a favorable determination letter. With the elimination of the five-year cycle for individually designed plans, it appears that plan sponsors will lose this valuable opportunity to correct errors without incurring the expense of a filing under the Employee Plans Compliance Resolution System (“EPCRS”). In addition, plan sponsors will soon be unable to rely on a plan’s most recent determination letter as evidence that their plans (or the plans of companies they hope to acquire) are qualified.
To provide other options, the IRS has expanded its preapproved plans program (i.e., master and prototype plans and volume submitter plans), which may be beneficial to some plan sponsors. However, preapproved plans generally cannot accommodate complex plan designs, which typically result from acquisitions and mergers.
We expect the IRS to issue future guidance regarding continued documentary compliance, and the effect of the changes in Announcement 2015-19 on other IRS programs, such as correcting errors under the EPCRS. The IRS is also requesting comments regarding additional changes it should make to facilitate the changes resulting from this Announcement