With Announcement 2015-19, the Internal Revenue Service has effectively ended the determination letter program for individually designed qualified plans as of January 1, 2017.  Individually designed plans can still obtain determination letters for the current cycle, ending January 31, 2106, and for Cycle A, which begins February 1, 2016 and ends in January 2017.  As a result, all individually designed plans should be able to receive at least a Pension Protection Act determination letter if they choose.  However, except in the case of a plan’s initial qualification or termination, the IRS will no longer issue determination letters to individually designed plans.  Keep in mind this means that an amendment to a plan adopted now, or even adopted in the last few years that was not part of the plan’s last determination letter filing, will not fall within the protection of a determination letter for a plan in cycles B, C and D.

Accordingly, the five-year cycle program that plan sponsors and their advisors have come to know and love is over.  The Service has stated that the program needed to end because it could not devote sufficient resources to reviewing the plans and was accordingly providing letters to plans without proper review.  The Service will continue to issue opinion letters and advisory letters to prototype and volume submitter plans.

So where does that leave individually designed plans?  This Alert provides some thoughts on the subject, but the Service is still accepting and reviewing comments from the benefits community, so these thoughts are just speculation for now.

Some plans will migrate to prototype or volume submitter plans to avoid the risk of operating without a determination letter.  While the deadline to adopt a Pension Protection Act prototype or volume submitter plan is April 30, 2016 (i.e., fast approaching), a plan sponsor may choose to rely on its individually designed Pension Protection Act letter (receiving effectively the same protections as adopting a Pension Protection Act prototype or volume submitter plan) and delay any move to a prototype plan or volume submitter plan until the next deadline for adoption, which will likely be April 30, 2022.  That gives sponsors of individually designed plans sufficient time to understand the impact of the determination letter program changes and proceed at their own pace.  

 While adopting a prototype plan or volume submitter plan may avoid the legal risks associated with the end of the determination letter program, it will not work for many of our clients’ individually designed plans unless the Service increases the flexibility to modify prototype and/or volume submitter plans to meet unique design features while still obtaining coverage from the opinion or advisory letter.  We are hopeful that such flexibility will be part of any updated guidance provided by the Service.

Some plans are simply too unique to move to a prototype or volume submitter program.  Otherwise, they might have done so years ago, simply for cost reasons.  For these plans, we have a few hopes that, if they come true, may lessen the concerns with “going naked”. 

First, we hope the Service takes the suggestion, discussed at an American Bar Association webinar on September 24 to extend the protections of the Pension Protection Act determination letter indefinitely for language that was in the plan at the time the letter was issued.  Doing so will remove the need to review and defend already existing and “blessed” plan language during an audit.  Instead, the focus and risk can be on new design changes and changes required by law.  With respect to new design changes, which may include changes resulting from plan mergers, we see little alternative than for plan sponsors and their advisors to carefully think through all of the necessary language for the plan amendment and the impact on plan qualification before implementing any amendment.  The Service will not be reviewing this language and will have no opportunity to issue suggested language until it audits the plan.  On audit, any mistakes could be penalized. With respect to changes in the law, the Service should offer an extended remedial amendment period to adopt required changes and issue model amendment language for plans to adopt.

Finally, and as also suggested during the ABA webinar, we hope that the Service will continue to focus its audit efforts on plan operations instead of plan language.  Currently, plan audits for plans with determination letters move quickly past plan document review (where required amendments were adopted timely) to plan operations.  There is some fear that without the determination letter program, these audits will become bogged down in disputes over required language.  Such disputes don’t help overall compliance.  What should matter to plan sponsors, plan participants and the government, is that plans provide the benefits due in a manner that complies with the law.  If plan language could have been better but plan operations were compliant, we are hopeful that Service auditors will be understanding and that sanctions will not apply or will be minimal.

The Service is clearly ready to listen to comments from the benefits community about the demise of the program.