“Failsafe” determination letter program is going away
Beginning in January 2017, the IRS is abolishing the staggered five-year amendment cycle for individually designed plans and will not accept determination letter applications based on the five-year cycle. If your organization offers an individually designed plan, this means you’ll face significantly higher burdens in order to stay in compliance.
In light of this change, plan sponsors should consider whether switching to a pre-approved plan is a viable option. Individually designed plans offer more flexibility and help you tailor the plan to your organization’s needs, but without the availability of determination letters, these plans will be more difficult to administer.
In response to a request by a plan sponsor, the IRS had been issuing determination letters with an opinion as to the qualified status of its retirement plan under IRS Code Section 401(a). Generally, if the employer received a favorable determination letter and operates its plan in accordance with its plan document, it was considered to be in compliance with IRS rules. A company operating its qualified retirement plan in accordance with its approved plan document can deduct contributions to the plan up to any applicable limits. Participants can defer income taxes on their contributions to the plan, and all contributions and related income are tax-deferred until distributed.
One of the hallmarks of the old determination letter program was a specific expiration date tied to an IRS-assigned cycle. Current determination letters no longer have expiration dates and any plan that has a determination letter dated prior to January 5, 2016, now has an inoperative letter.
Cycle A plans may continue to submit applications for determination letters until January 31, 2017. For all other plans, the IRS indicates there are three circumstances in which a plan sponsor can still submit an application for a determination letter.
- Initial plan qualification. If a determination letter has never been issued with respect to the plan, a plan administrator may submit the plan for initial qualification.
- Plan termination. An application can be considered in connection with plan termination only if it is filed by the later of (1) one year from the effective date of termination, or (2) one year from the date on which the action terminating the plan is taken. An application may not be filed later than 12 months from the date of distribution of substantially all plan assets in connection with the termination of the plan.
- Certain other limited cases. Unfortunately, the IRS has yet to define the limited instances in which they will allow plans sponsors to apply for a determination letter. In order to make sure that plan sponsors abide by the new regulations and laws by adopting necessary amendments in order to qualify a plan, the IRS and the Department of the Treasury will publish a “Required Amendments List” annually that will include changes to qualification requirements that will become effective within the amendment period and will also set the expiration date for that amendment period.
New remedial amendment periods effective January 1, 2017
The new IRS rules allow for an extended remedial amendment period for individually designed plans, during which a plan may be amended retroactively to comply with the IRS Code. This applies to disqualifying provisions such as absence of a provision or an amendment that did not satisfy the Code requirements.
- For a disqualifying provision in an existing plan – The end of the second calendar year after the amendment is adopted or effective, whichever is later.
- For a disqualifying provision in an existing plan that is related to a change in the qualification requirements – The end of the second calendar year that begins after the issuance of the Required Amendments List in which the new qualification requirement appears.
- For new plans – The later of (1) the 15th day of the 10th calendar month after the end of the plan’s initial plan year, or (2) the “modified 401(b) expiration date.”
- For governmental plans – The deadlines to amend the plan depend upon the close of the legislative session of the legislative body with authority to amend the plan.
Impact on Plan Sponsors
Pre-approved plans. Many companies adopt a pre-approved retirement plan. A pre-approved plan is a plan sold to employers by a document provider such as a financial institution or benefits practitioner. It might be a master and prototype plan or a volume submitter plan. The document provider requests IRS approval (or pre-approval) of a defined contribution or benefit plan as meeting the requirements of appropriate IRS code sections. The IRS issues a letter on the standardized plan, which the document provider then makes available to adopting employers. Employers then rely on that determination letter. For companies with pre-approved plans, the changes will likely have little or no impact.
Individually designed plans. It will be more important than ever for plan sponsors for individually designed plans to routinely monitor the operational and documentary compliance of their qualified retirement plans. Companies with individually designed plans may want to consider the advantages and disadvantages of changing to a standardized plan document. If the decision is to stick with the individually designed plan, we recommend working closely with an attorney specializing in ERISA regulations.
For any questions regarding the change in the determination letters process and how it affects your organization, contact your WK advisor at (573) 442-6171 or (573) 635-6196.
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