IRS Announces Major Changes in Determination Letter Program
The IRS has announced major changes to the determination letter program for individually designed qualified pension and profit-sharing plans. Under the changes, the IRS will only issue a determination letter upon the start of a plan, the termination of a plan, and under certain other limited circumstances that will be determined by the Department of the Treasury and the IRS. The changes will be generally effective as of January 1, 2017. A copy of Announcement 2015-19 may be found at: http://www.irs.gov/pub/irs-drop/a-15-19.pdf.
The changes also include:
- Elimination of the current 5-year remedial amendment cycles for individually designed plans;
- Transition period until December 31, 2017 for remedial amendment for individually designed plans under the current 5-year cycle; and
- Immediate elimination of off-cycle determination letter applications.
Cheiron Observation: The announced changes in the determination letter program represent a substantial curtailment of the ability to receive a favorable determination letter. We understand that the IRS is firm in the decision to change the determination letter program but will entertain comments concerning under what limited circumstances a letter may be requested other than the start of a plan or the termination of a plan.
Action Needed Now
Governmental plans and plans in cycle E (employer identification numbers ending in a "5" or a "0") should be aware that January 31, 2016, will be the last date for requesting a favorable determination letter. Accordingly, plan sponsors that need to request a letter should be sure to do so.1
The Internal Revenue Code (Code) provides favorable tax treatment with respect to "qualified" pension, profit-sharing, and stock bonus plans (collectively, retirement plans). The favorable tax treatment means that the employer can deduct in the current year plan contributions that will be distributed as benefits in later years, that the investment income earned by the plan's trust is not taxed, and that the benefits earned by the participants while working are not taxed until distributed. To maintain qualified status, retirement plans must be initially drafted and timely amended to comply with the qualification requirements of the Internal Revenue Code (Code). Code Section 401(b) and the regulations thereunder permit certain remedial amendment periods during which plans may be amended retroactively for compliance. For plans that were properly drafted, the IRS would issue a favorable determination letter which the plan sponsor could rely upon for favorable tax treatment.
The IRS has maintained two cyclical programs so that plan sponsors could be assured that their retirement plans are qualified and obtain a determination letter or its equivalent. One program is for pre-approved master and prototype plans that generally use prototype documents and an adoption agreement for employers, and is not affected by Announcement 2015-19. The other program is a 5-year cyclical remedial amendment system for sponsors of individually designed plans that require them to apply for determination letters once every five years. The plan sponsor can rely upon the favorable determination letter until its expiration date. In general, a plan's 5-year remedial amendment cycle is determined by reference to the last digit of the employer identification number (EIN) of the plan sponsor. Revenue Procedures 2007-44 and 2015-6 set forth the current rules for the issuance of determination letters under the 5-year cycle and permit sponsors to file determination letter applications off-cycle.
Summary of Announcement 2015-19
- Elimination of 5-year remedial amendment system: The staggered 5-year remedial amendment cycles (A through E) for individually designed plans will be eliminated effective January 1, 2017.
- Limited-scope determination letter program: Effective January 1, 2017, sponsors of individually designed plans will be permitted to submit determination letter applications only for (i) initial plan qualification (where a determination letter has never been issued with respect to a plan), and (ii) qualification upon plan termination. Notwithstanding, sponsors of cycle A plans, i.e., sponsors with EINs ending in "1" or "6", can continue to submit determination letter applications during the period beginning February 1, 2016, and ending January 31, 2017.
- Transitional remedial amendment period: As a result of the elimination of the 5-year remedial amendment cycles, the IRS will establish a transitional remedial amendment period for individually designed plans currently on the 5-year cycle. This remedial amendment period will end no earlier than December 31, 2017.
- Immediate elimination of off-cycle determination letter applications: Effective July 21, 2015, the IRS will no longer accept off-cycle determination letter applications, except for determination letter applications for new plans and for terminating plans.
- Other limited circumstances: The IRS and Treasury will determine, taking into consideration comments received, other limited circumstances whereby plan sponsors will be permitted to submit determination letter applications.
- Alternative methods for compliance: The IRS and Treasury are considering alternative ways for plan sponsors to comply with qualified plan document requirements, including (i) providing model amendments, (ii) not requiring the adoption of plan provisions or amendments that are irrelevant for a plan, or (iii) expanding plan sponsors' options to satisfy qualification requirements through incorporation by reference.
IRS Request for Comments
The IRS specifically requests comments on the following issues with respect to the changes to the determination letter program:
- What changes should be made to the remedial amendment period that would otherwise apply to individually designed plans under Code Section 401(b)?
- What additional considerations should be taken into account in connection with the current interim amendment requirement?
- What guidance should be issued to assist plan sponsors that wish to convert an individually designed plan into a pre-approved plan?
- What changes should be made to other IRS programs to facilitate the changes described in Announcement 2015-19?
Plan sponsors that wish to make comments should note that all comments must be submitted in writing and are due on or before October 1, 2015. Comments can be (i) mailed to the Internal Revenue Service, CC:PA:LPD:PR (Announcement 2015-19), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044; (ii) sent electronically to firstname.lastname@example.org (with "Announcement 2015-19" in the subject line); or (iii) hand delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (Announcement 2015-19), Courier's Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC.
All comments will be available for public inspection and copying.
- These sweeping changes to the determination letter process for individually designed plans represent a dramatic shift in the IRS's approach to assuring plan qualification, and will likely begin an era where individually-designed plan drafting relies more heavily on model amendments and incorporation by reference. The IRS will keep the pre-approved plan program and encourages plan sponsors to make use of the pre-approved plans. To that end, the IRS recently expanded the scope of the pre-approved program to include some cash balance plans and employee stock ownership plans.
- While the pre-approved program may be an avenue for some plan sponsors, it is not available for other plans sponsors. For example, multiemployer plans and variable annuity plans cannot use the pre-approved program. See Revenue Procedure 2015-36 for a complete list of plans that cannot use the pre-approved program.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.
1Revenue Procedure 2012-50 permitted a governmental plan to elect to file a determination letter request in cycle E ending January 31, 2016, rather than cycle C ending January 31, 2014.