The Internal Revenue Service (IRS) issued guidance on Jan. 4, 2016, that clarifies certain implications of its previously announced changes to the employee plans determination letter program. These clarifications, announced in Notice 2016-03 (Notice) are necessary to cover open issues raised from prior guidance that in effect shuts down the determination letter program for most amendments to individually designed plans.
Guidance provided in the notice
The Notice provides interim guidance until the IRS updates the more comprehensive Revenue Procedure 2007-44, which contains detailed guidance on the determination letter program. Employers may rely on this guidance until Revenue Procedure 2007-44 is updated.
The Notice generally explains that the future guidance will provide the following:
- As previously announced, the current determination letter program will end with the Cycle A filers (i.e., plans in this cycle included plans sponsored by employer with employer identification numbers that end in the number 1 or 6). Under the previous rules, employers that are part of controlled groups (or affiliated service groups) generally had been eligible to elect to have all retirement plans maintained by the group assigned to Cycle A. The Notice clarifies that plans of controlled groups (and affiliated service groups) will be eligible to file for determination letters during this next and final Cycle A (i.e., the cycle commencing on Feb. 1, 2016 and ending on Jan. 31, 2017) only if that group had made the required election to use Cycle A by Jan. 31, 2012 (i.e., the final day of the immediately preceding Cycle A filing period). This means controlled groups (and affiliated service groups) that that had not previously elected to file all their retirement plans service group under Cycle A cannot do so now.
- Expiration dates on determination letters issued before Jan. 4, 2016, no longer apply. Future guidance from the IRS will address the extent to which employers may rely on previously issued determination letters after subsequent changes in the law or the later adoption of plan amendments.
- Transition relief will aid employers that wish to convert from individually designed defined contribution plans to pre-approved defined contribution plans. Employers who adopt a pre-approved defined contribution plan on or after Jan. 1, 2016, may (if permitted) apply for determination letters until April 30, 2017. Employers who adopted a preapproved defined contribution plan before January 1, 2016, may (if permitted) apply for determination letters by April 30, 2016. The IRS issued Revenue Procedure 2016-6 to explain the limited circumstances under which an employer that has adopted a preapproved plan may apply for a determination letter. This guidance is generally unchanged from prior guidance in that employers who adopt volume submitter plans may apply for determination letters only if they make limited changes to the language in the specimen plan document.
Implications for employers
As noted above, employers may rely on the changes discussed in the Notice until the IRS updates Rev. Proc. 2007-44. That means that Cycle A employers should consider applying for determination letter applications for their plans considering that it may be the last chance to receive formal blessing of their documents from the IRS. Interestingly, the revocation of expiration dates on previously issued determination letters suggests that any Cycle E employers who previously received determination letters for their plans but have not yet filed under the current cycle (which ends Jan. 31, 2016) may want to consider foregoing filing for an updated determination letter. Nevertheless, the Notice does not prohibit Cycle E employers from filing for an updated determination letter application by Jan. 31, 2016, and similar to Cycle A employers, it may be prudent to file for an updated application. Finally, employers who adopted individually designed plans will have a little over a year to consider adopting a pre-approved plan, which would allow the plan to rely on the pre-approved plan sponsor’s advisory or opinion letter from the IRS.
The long term implications of this Notice are unclear. Employers and their advisors are very concerned about the comfort they can have about their qualified plans’ ability to satisfy the qualified plan rules. Some may be encouraged by the issuance of the Notice by the IRS, along with the expected news that the IRS plans to explain how future law changes and subsequent amendments will affect prior determination letters; but there are many unanswered questions.