The Internal Revenue Service (the “IRS”) recently released Notice 2016-03, which provides additional details for plan sponsors on the curtailment of the determination letter process for individually designed tax-qualified retirement plans in the U.S. In Announcement 2015-19, the IRS previously indicated that effective January 1, 2017 the IRS would be eliminating the staggered five-year determination letter remedial amendment cycles for individually designed plans and would be limiting the scope of the determination letter program for individually designed plans. We have previously summarized Announcement 2015-19 here.

Notice 2016-03

Updating the future of the plan-approval process, Notice 2016-03 provides that the IRS will be issuing guidance to the effect that:

  • Controlled groups and affiliated service groups that made a Cycle A election prior to January 31, 2012 (the last day of the previous Cycle A submission period) will be permitted to submit determination letter applications during the Cycle A submission period beginning February 1, 2016 and ending January 31, 2017.
  • Expiration dates with respect to determination letters issued prior to January 4, 2016 are no longer operative, and future guidance will clarify the extent to which an employer may rely on a determination letter after a subsequent change in law or plan amendment.
  • The deadline for an employer to adopt a current defined contribution pre-approved plan and to apply for a determination letter is extended from April 30, 2016 to April 30, 2017 with respect to any defined contribution pre-approved plan adopted on or after January 1, 2016 (other than a plan that is adopted as a modification and restatement of a defined contribution pre-approved plan that had been maintained by the employer prior to January 1, 2016). The IRS explained that this extension will facilitate a plan sponsor’s ability to convert an existing individually designed plan into a current defined contribution pre-approved plan. 

According to Notice 2016-03, the future guidance described above will come in the form of modifications to Revenue Procedure 2007-44, which sets forth the rules and procedures governing the remedial amendment cycles for individually designed plans.

Although the plan determination letter process is being dramatically curtailed, there may continue to be real value for employers in obtaining updated letters for their tax-qualified retirement plans, where doing so is still possible. Therefore, sponsors of Cycle A plans who are eligible to obtain an updated determination letter may wish to consider submitting an application for a letter on or before January 31, 2017.

Moving Forward

For years, the determination letter process has been a hallmark of market practice surrounding tax-qualified plans. Going forward, it will be interesting to see how plan sponsors adapt to a world without the IRS’s periodic review and approval of their complex retirement-plan documents.

Employers are of widely varying types and sizes, and may have extremely varied compliance considerations. It remains to be seen how much the combination of initial IRS approval, available IRS model language and IRS approval of plan terminations, together with a presumably expanded voluntary-compliance-system, will provide employers with sufficient practical comfort regarding plan establishment and administration. It may be expected (and indeed the IRS may well be expecting) that some employers with individually designed plans will move towards more commoditized master-and-prototype and volume submitter plans.

Factors affecting the way in which the curtailment of the IRS approval process could affect particular plan sponsors may include such things as the extent to which the sponsor seeks to tailor the design of its plans to its particular needs and goals, and the extent to which the employer is actively involved in mergers and acquisitions and other corporate transactions. Regarding corporate transactions, it may be expected that approaches (hopefully, practical approaches) will develop over time in response to the curtailment of the program.