At the ABA Tax Section May Meeting in Washington, DC, on May 8, 2015, officials with the Internal Revenue Service (“IRS”) confirmed that the “cycle” determination letter program for individually-designed plans (“IDPs”) will end in 2017 after the close of Cycle A. On and after February 1, 2017, determination letters will be available for issuance for an IDP only in the case of an initial determination letter for a new plan or a termination of a plan. IRS will continue to issue favorable opinion letters for pre-approved prototype and volume submitter plans (“preapproved plans”).
The primary reason given for the change in the program is the lack of resources. IRS officials noted that its staffing is down to approximately 100 agents who review determination letter applications. As a result, the average time that an agent is able to spend reviewing a determination letter application is only 3 hours, which is not sufficient time to do a thorough review of a plan’s qualified status. Due to budget cuts, IRS is not able to hire new agents (or replace terminated agents).
The bottom line is that, unless there is reversal of its decision, after 2016 sponsors of tax-qualified 401(k)s, ESOPs and pension plans will no longer be able to request a favorable determination letter for an on-going plan. While preapproved plans will continue to have letters, currently they are not available for all types of IDPs, such as in the case of cash balance plans and ESOPs. Also, there are many older pension plans that must maintain multiple benefit formulas and other benefits, rights and features from prior plans that were merged into the current plan in order to comply with Section 411(d)(6) of the Internal Revenue Code. Currently, we are not aware of any pre-approved plans that can handle these complex pension plans. IRS noted that when major law changes occur, the intent is that IRS will continue to issue model and sample amendments that plan sponsors may use to keep their IDPs compliant.
IRS officials indicated that a notice or announcement would be issued this summer providing more details about the change in the determination letter program. IRS will be seeking comments on what “exceptions” may be needed from the general cessation of the determination letter program, at least during the initial period following the change.
Clearly, there are a lot of unanswered questions at this time. For example:
- What is a “new plan”? Will it include the spin-off of a qualified plan in connection with a corporate transaction?
- Will there be Section 411(d)(6) relief so that established pension plans can change old formulas so that those plans can fit within a preapproved plan?
- Will EPCRS be revised to provide plan sponsors an avenue to fix plan documentation issues? What happens on audit if an agent challenges the plan document? Will the plan sponsor be subject to Audit CAP?
- How will the lack of a current determination letter affect the IDP’s annual internal audit? Will outside auditors require additional assurances from outside counsel?
- Will the lack of a current determination letter require a formal opinion of counsel on the plan’s qualified status in order to file an SEC Form S-8 Registration Statement?
- What will be the impact on representations and warranties in corporate transactions (such as mergers and acquisitions) and credit agreements?
- Will plan sponsors be requested to obtain opinion letters from outside counsel on the plan’s qualified status (whether in the context of a transaction or in the normal course)?