Revenue Procedure 2016-37, released June 29, 2016, curtails the IRS determination letter program with respect to individually designed qualified pension, profit sharing, or stock bonus plans. The final determination letter filing cycle for individually designed plans will be Cycle A, ending December 31, 2017. Accordingly, plan sponsors whose employer identification numbers end in 1 or 6 still have an opportunity to file under the existing process.
While the determination letter process remains available for pre-approved retirement plans, plan sponsors of individually designed plans may apply for a determination letter under the new rules only upon the establishment or termination of a qualified retirement plan. Aside from establishment or termination, no formal IRS mechanism will exist for determining whether an interim plan amendment or a plan merger or spinoff will adversely affect the qualified status of an individually designed plan. The IRS has indicated, however, that it may open the determination letter process for individually designed plans in limited circumstances from time to time.
Employers that adopt or maintain pre-approved master, prototype, or volume submitter plans may continue to apply for determination or opinion letters other than at plan establishment or termination. As at present, these plans will be able to obtain updated determination letters at six-year intervals.
The New Regime1
Revenue Procedure 2016-37 abolishes the five-cycle process for individually designed plans. Cycle A, ending on January 31, 2017, will be the last determination letter filing cycle for individually designed plans. After that, determination letter applications will be accepted for individually designed plans in only three circumstances:
- A plan that has never before received a determination letter may apply for one at any time. Newly established plans will thus be able to begin operations with assurance that their provisions are not fatally flawed at the outset.
- A terminating plan may apply for a determination letter, so long as its application is submitted within one year after the date of plan termination. Special rules cover the rare cases in which a plan is terminated retroactively or distributes all of its assets before it formally terminates.
- The IRS will consider each year whether to accept determination letter applications from ongoing individually designed plans in response to particular developments, such as significant law changes, new approaches to plan design, and the inability of certain types of plans to convert to pre-approved (that is, master, prototype, and volume submitter) plan documents. If, for instance, Congress were to enact comprehensive rules dealing with phased retirement and partial pension distributions, plans that adopted those features might reasonably expect an opportunity to update their determination letters. Similarly, if pension reform legislation modified a governmental plan, hopefully the IRS would be willing to update a determination letter. The Revenue Procedure cautions, though, that “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.”
Previously, controlled groups and affiliated service groups with multiple plans were allowed to elect to file for all of their plans in Cycle A. The Revenue Procedure states, however, that the IRS will not recognize Cycle A controlled group elections made after January 31, 2012 (the closing date of the Cycle’s last window), although employers that later become part of a controlled group that made a timely election will be allowed to join the filing of the new controlled group.
The determination letters of individually designed plans will no longer “expire,” but will protect only plan provisions that were considered by the IRS when the letter was issued and that have not been affected by subsequent changes in the law. As a result, the efficacy of such a determination letter will dwindle over time. The Revenue Procedure announces two measures that may help plan sponsors keep their documents in compliance:
- An annual Required Amendments List will set forth deadlines for adopting plan amendments to reflect changes in plan qualification requirements. Items will appear on this list only after the IRS has published what it regards as adequate guidance on how to implement the change. Each year’s list will presumably include all pertinent material from prior lists (the IRS’s practice with its current “Cumulative List of Changes in Plan Qualification Requirements,”) so that it will not be necessary to retain, collate, and consult years or, eventually, decades of issuances. The first Required Amendments List should appear late this year, following the precedent of the Cumulative Lists.
The Required Amendments List will make it simpler to determine when and in what respects a plan must be amended in order to preserve its qualified status. However, it may not be helpful in resolving questions about what such amendments should say. Under the old procedure, a plan sponsor could obtain assurance not only that it had included necessary amendments in its plan documents but that the plan language itself was acceptable to the IRS. From now on, differences of opinion on plan amendment wording will have to be resolved under the IRS’s Employee Plan Compliance Review System (EPCRS), with the possibility of penalties if the IRS disagrees with the sponsor’s interpretation of the law.
- A separate Operational Compliance List will detail changes in qualification requirements that must be currently reflected in plan operations. Changes will usually appear here before they are added to the Required Amendments List, because there will be no delay to wait for IRS guidance. Plans must attempt in good faith to comply with all qualification requirements that currently affect them, even if the deadline for adopting a corresponding amendment has not yet occurred. The Operational Compliance List will be similar to the present Cumulative List, but plans will not have to adopt interim “good faith amendments” reflecting the items that appear on it.
The Revenue Procedure revises, and in some ways clarifies, the IRS’s position on the deadlines for plan amendments. Several distinct situations exist, each subject to a different rule:2
- A newly established plan ordinarily may apply for a determination letter. If the IRS reviewer finds that amendments are needed, the letter will be conditioned upon their adoption within 91 days.3 The review will consider only items appearing on the Required Amendments List that was issued in the second calendar year before the application (e.g., the 2016 list for applications submitted in 2018). Reviews in 2017 will be based on the 2015 Cumulative List (Notice 2015-84). A side effect of this scope of review is that determination letters will have limited value upon issuance, since they will not provide any protection with respect to qualification requirement changes that were not on the list that the reviewer considered.
- Amendments to reflect changes in qualification requirements do not have to be adopted until after they appear in the Required Amendments List. The deadline will then be the end of the second calendar year following the issuance of the list, unless otherwise specified.
- If a plan amendment contains a qualification defect, the deadline for correcting it without penalty will be the end of the second calendar year following the later of the date of its adoption or its effective date. If no correction is made by then, the defect will have to be remedied through EPCRS, which will usually necessitate an application to the IRS and payment of a penalty.
- Under the old rules, plans were required to adopt “interim” amendments to reflect changes in qualification requirements. These amendments could then be put into “final” form when the plan next applied for a determination letter. Now the final versions of all past interim amendments will be due by December 31, 2017. In many instances, the interim language will need no revision, but it should be carefully scrutinized before the end of next year.
- A terminating plan must be amended no later than its date of termination to reflect all qualification requirements that are in effect at that time, regardless of whether they have yet been included on the Required Amendments List. Since determination letter applications will be accepted upon plan termination, any disagreements regarding the proper amendment language must be worked out with the IRS reviewer. One probably unanticipated consequence is that these reviews may become substantial projects. A plan that terminates 10 or 20 years from now may well contain dozens of required and discretionary amendments, none of them ever the subject of a determination letter. If a reviewer in 2030 uncovers a problem with an amendment adopted in 2018, will it be practicable to “correct” it?
- A plan amendment that has no effect on qualification (a “discretionary amendment,” in IRS parlance) must be adopted by the end of the first plan year in which it “is operationally put into effect,” that is, “when the plan is administered in a manner consistent with the intended plan amendment (rather than existing plan terms).” A calendar year plan may, for instance, offer a new distribution option at any time during 2017, so long as it is appropriately amended no later than December 31, 2017.
- In the past, the IRS said only that discretionary amendments had to be adopted by the end of the plan year in which they were “effective,” a less than precise formulation. Suppose that a defined benefit plan is amended during 2016 to increase benefit accruals for credited service in 2015. The effective date of the amendment would ordinarily be January 1, 2015. Revenue Procedure 2016-37 makes clear that such an amendment is not untimely, as it has no impact on plan administration until 2016.
Observations on the New Regime
Plan sponsors should review the impact of the Revenue Procedure to develop a strategy for maintaining the qualified status of their individually designed plans. Plan sponsors might also want to explore alternatives to a favorable determination letter, such as obtaining a legal opinion from counsel regarding the ongoing qualified status of their plans. Further, any attempt by plan sponsors to convert individualized plans to pre-approved plans should be carefully considered with assistance from legal counsel. Plan sponsors of individually designed plans should confer with their plan auditors to work out in advance how to satisfy the auditors of the plans’ qualified status in the absence of a current favorable determination letters. Finally, plan sponsors should review their credit agreements to determine whether any warranties that they made regarding the qualified status of the plans are still applicable.