On June 29, 2016, the Internal Revenue Service (“IRS”) issued Revenue Procedure 2016-37, which changes the determination letter program for tax-qualified individually designed plans and implements a new system for when these plans must be amended.
Effective January 1, 2017, the 5-year determination letter cycle - the one we were just getting used to - will be eliminated. However, Cycle A plans can still file a determination letter on or prior to January 31, 2017. If your plan will remain individually designed after 2016 and it is a Cycle A plan, filing for this last determination letter is prudent.
On and after January 1, 2017 (other than the last Cycle A filing), individually designed plans will be allowed to submit determination letters upon initial qualification, upon termination, and at other times permitted annually by the IRS. Regarding the “other times” that individually designed plans will be allowed to submit determination letters, the IRS stated:
“In addition, the IRS's current case load and resources available to process determination letter applications will be significant factors in deciding if and when to consider certain amended plans or types of amendments in plans under the determination letter program.”
Accordingly, during 2017, filings upon initial qualification and termination will be the only permitted filings.
Around October of each year, the IRS intends to issue a Required Amendment List for individually designed plans. In order for such individually designed plans to remain qualified, items on the list must be adopted no later than the last day of the second calendar year following the year in which the list is issued. For example, the list issued in 2016 must be adopted no later than December 31, 2018. New legislation or IRS guidance may, from time to time, require other amendments. In addition, discretionary amendments must be adopted by the end of the plan year in which the plan amendment is operationally put into effect.
The IRS also introduced a new Operational Compliance List concept, which will identify changes in qualification requirements that are effective during the calendar year. This should be helpful for administrative fiduciaries in monitoring administrative compliance for all plans, not just individually designed ones.
Individually Designed or Pre-Approved?
It’s not clear whether the new system will make maintenance of individually designed plans easier or more difficult than the process under the 5-year cycle system. Therefore, now may be a good time to review the terms of your individually designed plan to determine whether it can easily move to a pre-approved document or whether the individually designed plan contains certain desired terms that you prefer not to give up.