On June 29, 2016, the IRS released a long awaited Revenue Procedure detailing the changes to the existing determination letter remedial amendment cycle process for individually designed retirement plans. The IRS indicated over the past year that it intended to end its remedial amendment cycle program through which employers with individually designed retirement plans could submit their plans to the IRS for review every five years. Employers were split among the 5-year cycle groups based on either their Employer Identification Number or some other qualifier (i.e. multiple employer plans, plans in a controlled group of companies, etc.). In this process, the IRS would review the plans, work with employers regarding any provisions that it considered needed revision to retain qualified status, and ultimately issue a determination letter which essentially provided the IRS’s stamp of approval as to the plan’s qualified status.
Under the new rules established under Rev. Proc. 2016-37, the IRS will no longer accept applications for these determination letters on individually designed retirement plans unless one of the following exceptions apply:
- An employer is establishing a new plan;
- An employer is terminating an existing plan; or
- The IRS makes some sort of special exception. Such special exceptions could potentially include: a significant law change; new approaches to plan design becoming prominent in the plan industry; or inability of certain types of plans to convert to pre-approved plan documents. The IRS will measure these needs by gauging annual input from the retirement plan community. Of course the IRS provides the caveat that any such special exception will always be subject to their capacity to work on the additional applications.
The new rules go into effect on January 1, 2017. There will be no last determination letter application opportunity as many hoped. The program will end with its final cycle filing, with a deadline of January 31, 2017, only available to those employers who fall within that last cycle group (Cycle A – EINs ending in 1 or 6). As of January 4, 2016, determination letters will no longer contain an expiration date and expiration dates included in letters issued before that date will no longer be operative.
So, can employers continue to rely on determination letters without expiration dates or where the expiration date has passed? The IRS provided that employers may continue to rely on a letter with respect to any plan provision that is not subsequently amended or subsequently affected by a change in law. Moving forward employers are expected to maintain their qualified status by following the IRS’s annual Required Amendment List, which will be released in the fourth quarter of every year. Individually designed plans then have until the end of the second calendar year following the year of the Required Amendment List release to adopt those changes. (i.e. an amendment listed on the 2016 Required Amendment List must be adopted by December 31, 2018). However, employers must still operate their plans in accordance with a required amendment as of the effective date of the change in law. As has already been the case, discretionary amendments will still be required by the end of the plan year in which the amendment is operationally put into effect.
Many suspect that the IRS’s expectation in ending the remedial amendment 5-year cycle program is that employers will decide to switch to prototype or volume submitter plans for the security of maintaining qualified status. Under prototype or volume submitter plans the plan sponsor, typically some sort of retirement plan service provider, has a “master” plan which contains a multitude of options within it, from which the employer can choose. The employer then adopts whichever variation of this “master” plan fits its particular needs. Under the new rules these “master” plans will continue to be reviewed by the IRS. These plans are on a separate review remedial amendment cycle, and are issued opinion or advisory letters, which similarly provide employers adopting their variations of “master” plans the security of maintaining qualified status. The new rules extend the upcoming cycle period for prototype and volume submitter plans to begin on August 1, 2017, and end on July 31, 2018, likely to accommodate an influx of applications of both the final determination letter filings and an increase in prototype filings in light of these new rules.
So how should employers respond to this change?
Nothing will change for employers who already use prototype or volume submitter plans. However, employers with individually designed plans that are able to file one last determination letter application should be especially cautious with that filing and fully consider any changes their plan has either undergone since its last determination letter, or anticipates in the future. Those plans may want to incorporate those anticipated changes sooner than they originally thought in order to have that plan design locked in under its last opportunity for a determination letter. For those employers who are not able to submit one last determination letter application, they should be more cautious over any changes to their plans, ensuring those changes do not negatively affect their plans’ qualified status. Finally, all employers with individually designed plans should consider whether switching their plans to a “master” plan makes sense for them. The IRS has opened the door for plan sponsors to obtain opinion or advisory letters for “master” ESOP and Cash-Balance plans, which are currently unavailable. Those “master” plan filings are in their infancy, but will eventually be available to employers with those types of individually designed plans as well.