End of an era: Routine IRS determination letters for qualified plans phased out
For many years, those of us practicing in the qualified retirement plan field have worked with clients to amend and update their retirement plans to keep their documents compliant with the requirements of the Internal Revenue Code (Code). As part of that process, we would file the amended or restated plan documents with the Internal Revenue Service (IRS) for the issuance of a favorable determination letter.
The determination letter gave the employer the assurance that the language in the document complied with the Code and if the terms of the document were followed the employer could reasonably believe the contributions made were tax deductible and the benefits created were tax-deferred. In short, the tax-favored status of the plan was maintained.
That practice is coming to an end. With the filing due for employers with EINs ending in 1 or 6 on January 31, 2017, the IRS is no longer accepting determination letter filings on ongoing plans except in unspecified circumstances. The IRS will accept determination letter requests for new plans and for plans that are terminating. The IRS will not accept determination letter requests on ongoing plans except in limited situations, which the IRS has yet to reveal.
The IRS is emphasizing the use of preapproved documents. Specifically, the IRS is effectively pushing employers to use prototype plans and/or volume submitter documents.
These documents do have the advantage of IRS review and employers can rely on the letters issued to the sponsors of the prototype plans or volume submitter document.
The disadvantage is that an employer is limited to the specific options available under those preapproved documents. If the employer wants to do something that is not an available choice or if the employer has a unique fact pattern that needs to be addressed, the employer is out of luck.
For many employers, the pre-approved documents will work well. For others, they will be in a difficult situation. If their particular circumstance is one of the situations the IRS will permit a request they may receive a letter. If not, they have no reliance that their document or the amendment to their document complies with the Code. They will only find out if they are right if they survive an audit.
This is a new world for employers and their advisors. It has been a little while since there were major changes to the Code that required massive revisions to plan documents. But how long will that last? There is pressure for revenue and there is pressure to create more coverage of employees in plans. One or both may create changes to the Code and require significant plan document changes. One can only hope the IRS will accept determination letter requests for such Code-mandated changes.
There may also be situations that the appropriate professional advice to an employer will be to submit for a situation for review and/or correction using the IRS’ Employee Plan Compliance Resolution System (EPCRS). It is not clear what document issues might be addressed in the program once the determination letter program is limited, but by using the EPCRS program, an employer may gain some level of comfort.
How employers and their professional advisors navigate these unchartered waters has yet to be seen. But things will be different.