The Internal Revenue Service (the “IRS”) on July 21, 2015, issued Announcement 2015-19, describing important changes to the determination letter program for individually designed tax-qualified retirement plans. These changes will limit the situations in which a plan sponsor may apply for a determination letter from the IRS.

Background

The IRS determination letter process has been a long-standing practice that has allowed plan sponsors to obtain the IRS’s approval that the form of their plan document satisfies the numerous and complex requirements for qualification under the Internal Revenue Code. Under current IRS rules, plan sponsors are permitted to apply for a determination letter once every five years. In addition, a plan’s remedial amendment period (i.e., the period during which a plan may be retroactively amended with respect to any “disqualifying provisions”) coincides with the plan’s five-year determination letter cycle.

The determination letter process has been seen as a critical aspect of plan establishment, maintenance and administration. The potential consequences resulting from plan disqualification include lost deductions, taxability to participants, taxation of the related trust and disqualified rollovers, among others. Therefore, the level of financial risk can be significant.

Elimination of Five-Year Determination Letter Cycles

Due to the need to use its limited resources more efficiently, the IRS is modifying the determination letter program for individually designed plans as follows:

  • effective January 1, 2017, the IRS will eliminate the staggered five-year determination letter remedial amendment cycles for individually designed plans. As of that date, the IRS will no longer accept determination letter applications based on the five-year remedial amendment cycles;1
  • effective January 1, 2017, the IRS will limit the scope of the determination letter program for individually designed plans to initial plan qualification and qualification upon plan termination. Plan sponsors will also be permitted to submit a determination letter application in certain other limited circumstances as determined by the IRS. The IRS will identify such circumstances on a periodic basis; and
  • effective July 21, 2015, the IRS will cease accepting off-cycle determination letter applications, except for determination letter applications for new plans and terminating plans.

Transition Period

As indicated above, under current IRS rules, the remedial amendment period for correcting disqualifying provisions is the end of a plan’s five-year determination letter cycle. As a result of the elimination of the five-year determination letter cycles, the extension of the remedial amendment period will no longer apply. However, the IRS intends to extend the remedial amendment period for individually designed plans to at least December 31, 2017.

In addition, in connection with the modification of the determination letter program, the IRS is considering ways to make it easier for plan sponsors to comply with the qualified plan document requirements. This may include providing more model amendments, and allowing additional qualification requirements to be incorporated by reference.

Request for Comments

The IRS has requested comments by October 1, 2015 on certain specific issues triggered by the elimination of the five-year determination letter cycles, including, what guidance is necessary with respect to:

  1. the adoption of interim amendments;
  2. the conversion of an individually designed plan into a pre-approved plan; and
  3. the Employee Plans Compliance Resolution System.

Future Consequences

The elimination of the five-year determination letter program will likely have significant consequences to plan sponsors. We expect that, in a number of cases, plan sponsors may consider converting their individually designed plan to a pre-approved form, such as a master-and-prototype plan or a volume-submitter plan. In addition, sponsors may become less willing to implement any changes that would take the plan out of pre-approved status. We are concerned that there could be a stifling of creativity and an increasing commoditization of plans, that in certain cases will be to the detriment of plan participants. The precise impact of the IRS’s proposed way forward is yet to be known and will presumably develop over time.