Rev. Proc. 2016-37 ends the ability of ongoing individually designed retirement plans to get determination letters, changes the remedial amendment period, and generally eliminates the requirement that plans adopt interim amendments. Rev. Proc. 2016-37 is effective January 1, 2017, and its text is at this link. This Alert addresses the new rules that apply to individually designed retirement plans.

Action Needed Now: Sponsors of existing individually designed plans will need to make sure they pay careful attention to the new deadlines for any required amendments. Although the IRS will no longer accept determination letter applications for ongoing retirement plans, sponsors of Cycle A plans can continue to submit determination letter applications until January 31, 2017.

Background

Internal Revenue Code (Code) § 401(a) requires that retirement plans contain certain provisions in order to qualify for tax-exempt status. Required provisions are often changed by new tax legislation. Up to now, IRS has operated a program under which retirement plans may apply for a determination letter to confirm that they meet those requirements.

Code § 401(b) provides a remedial amendment period during which a plan may be amended retroactively to comply with the Code's qualification requirements. Rev. Proc. 2007-44 established a system of staggered remedial amendment periods for individually designed plans and divided the plans into five separate groups. This created a five-year cycle such that plans needed to be updated for changes in the qualification requirements every five years. Any amendments required as a result of legislation or regulations are published annually by the IRS in the Cumulative List of Changes in the Plan Qualification Requirements (Cumulative List). In addition, when any statutory or regulatory change with respect to a plan's qualification requirements affects the written plan document, the adoption of an interim amendment generally was required.

Announcement 2015-19 stated the IRS was going to eliminate the five-year staggered remedial amendment period for individually designed plans and limit the scope of the determination letter program. In the future, determination letters would only be issued for newly adopted plans, terminating plans, and certain other plans as specified. Rev. Proc. 2016-6 provided that, effective as of January 4, 2016, determination letters issued to sponsors of individually designed plans would no longer contain an expiration date. In Notice 2016-03, the IRS announced that guidance would be issued to provide that:

• Controlled groups and affiliated service groups that previously made a Cycle A election are permitted to submit determination letter applications during the Cycle A submission period beginning February 1, 2016 and ending January 31, 2017; and
• Expiration dates on determination letters issued prior to January 4, 2016 are no longer operative.

Changes for Individually Designed Plans under Rev. Proc. 2016-37

Rev. Proc. 2016-37 formally carries out the statements made in Announcement 2015-19 and Notice 2016-03. It also addresses some other questions (but not all) that have arisen with respect to the revised program. Key changes to note are summarized below.

• Effective January 1, 2017, the staggered five-year remedial amendment periods are eliminated for individually designed plans (excepting Cycle A plans through January 31, 2017), and sponsors of individually designed plans can submit a determination letter application in only the following instances:
  • Initial plan qualification on Form 5300 - so long as a favorable determination letter never has been issued with respect to the plan,
  • Upon termination - however only if the application is filed no later than the later of (i) one year from the effective date of the termination, or (ii) one year from the date on which the action terminating the plan is taken, and in no event later than 12 months from the date of distribution of substantially all plan assets in connection with the plan termination, and
  • Potentially in these other circumstances as announced by the IRS:
    • significant law changes,
    • new approaches to plan design,
    • the inability of certain types of plans to convert to pre-approved plan documents, and
    • additional situations announced in published guidance published in the Internal Revenue Bulletin.

    Note, Rev. Proc. 2016-37 states that the IRS's caseload and available resources for processing determination letter applications will be significant factors in deciding whether to consider certain amended plans or types of amendments in plans under the new determination letter program.¹ Based on the IRS's current resources and caseload, the only determination letter applications that it will accept for individually designed plans during the calendar year 2017 (other than for Cycle A plans) will be applications for initial plan qualification and for qualification upon plan termination.

• Effective January 1, 2017, sponsors of individually designed plans are no longer required to adopt interim amendments, as currently required by Rev. Proc. 2007-44. This change applies with respect to interim amendments that would have had an adoption deadline on or after January 1, 2017, had the interim amendment requirement remained in effect. However, the interim amendment requirement continues to apply to individually designed plans with respect to interim amendments with adoption deadlines prior to January 1, 2017.

• For disqualifying provisions arising due to changes in qualification requirements, Treasury and the IRS intend to publish annually a Required Amendments List that will establish the deadline for a plan to be amended to comply with requirements identified on the list. Unless otherwise provided, that deadline will be the end of the second calendar year following the calendar year in which the list is issued. In general, a change to the qualification requirements will not appear on a Required Amendments List until guidance with respect to such change (including model amendments, if any) has been provided in regulations or in other guidance published in the Internal Revenue Bulletin. The first Required Amendments List will apply to changes in qualification requirements first effective during the 2016 calendar year.

• For plans that are not governmental plans, Rev. Proc. 2016-37 extends the remedial amendment period for individually designed plans to correct disqualifying provisions:
  • For new plans: The remedial amendment period for a disqualifying provision is extended to the later of (i) the 15^th day of the 10^th calendar month after the end of the plan's initial plan year or (ii) the "modified § 401(b) expiration date."²
  • For existing plans: Generally, the remedial amendment period for disqualifying provisions is extended to the end of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later. Note certain exceptions apply.
  • Arising due to a change in qualification requirements: The remedial amendment period for a disqualifying provision is extended to the end of the second calendar year that begins after the issuance of the Required Amendments List in which the change in qualification requirements appears.

• For plans that are governmental plans, Rev, Proc. 2016-37 extends the remedial amendment period for individually designed plans to correct disqualifying provisions:
  • For new plans: The remedial amendment period for disqualifying provision is extended to the later of: (i) the later of (a) the 15^th day of the 10^th calendar month after the end of the plan's initial plan year or (b) the "modified § 401(b) expiration date;" or (ii) 90 days after the close of the second regular legislative session of the legislative body with the authority to amend the plan that begins after the end of the plan's initial plan year.
  • For existing plans: Generally, the remedial amendment period for disqualifying provisions is extended to the later of: (i) the end of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later; and (ii) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after the calendar year in which the amendment is adopted or effective (whichever is later). Note certain exceptions apply (see § 5.06(3) of Rev. Proc. 2016-37).
  • That arise as a result of a change in qualification requirements: The remedial amendment period for a disqualifying provision is extended to the later of: (i) the end of the second calendar year that begins after the issuance of the Required Amendments List in which the change in qualification requirements appears; or (ii) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date of issuance of the Required Amendments List in which the change in qualification requirements appears.

• Provides a transition rule that extends the remedial amendment period for disqualifying provisions for which, as of January 1, 2017, the remedial amendment period under Rev. Proc. 2007-44 has not expired to December 31, 2017.

• Provides that the scope of review for an individually designed plan submitted for a determination letter will be based on the Required Amendments List that was issued during the second calendar year preceding the submission of the determination letter application and takes into account all previously issued Required Amendments Lists (and Cumulative Lists issued prior to 2016). Plans submitted for initial qualification during 2017 will be reviewed based on the 2015 Cumulative List (Notice 2015-84). With the exception of terminating plans (which will be reviewed for amendments required to be adopted in connection with plan termination), individually designed plans must be restated to incorporate all previously adopted amendments to the plan as of the date the determination letter application is submitted (which only impacts new plans or those that have never received a favorable determination letter).

• Provides that plan sponsors may not continue to rely on previously issued favorable determination letters with respect to any plan provision that is subsequently amended or that is subsequently affected by a change in law but may continue to rely such determination letters with respect to plan provisions that are not amended or affected by a change in law.

CHEIRON OBSERVATIONS

Rev. Proc. 2016-37 does not change a plan's operational compliance standards. Therefore, employers need to operate their plans in compliance with any change in qualification requirements from the effective date of the change, regardless of the plan's § 401(b) period for adopting amendments.

Rev Proc. 2016-37 does not provide any additional relief from the requirements of Code § 411(d)(6), which generally prohibits plan amendments that decrease a participant's accrued benefits or early retirement benefits.

Sponsors of new plans that receive, or of existing plans that have received, a favorable determination letter should not restate the plan for subsequent changes in law because they will possibly lose their reliance upon the provisions that were subject to the favorable determination letter. Instead, the plan should be amended for later changes.

Cheiron pension consultants can assist plan sponsors with their plan qualification requirements, including amendments and determination letter filings.

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.

¹ Treasury and IRS intend to request, on a periodic basis, comments on additional situations in which the submission of a determination letter application may be appropriate.

² The modified § 401(b) expiration date for a plan that is not maintained by a tax exempt employer is the last day of the remedial amendment period determined under § 1.401(b)-1(d)(2), applied as though the employer has an extension to file its income tax return (or partnership return of income). The modified § 401(b) expiration date for a plan maintained by a tax exempt employer is the last day of the remedial amendment period determined under § 1.401(b)-1(d)(2) applied as though the due date (including extensions) for filing the income tax return for the employer's taxable year is the date determined under the following rules. The due date for filing the employer's tax return in the case of a tax exempt employer that files Form 990-T (or Form 990 or Form 990-EZ if no Form 990-T is filed) is the later of (i) the 15^th day of the 10^th month after the end of the employer's tax year (treating the calendar year as the tax year if the employer does not have a tax year) or (ii) the due date for filing the Form 990 series (plus extensions). The due date for filing the employer's tax return in the case of a tax exempt employer that is not required to file a Form 990 series return is the 15^th day of the 10^th month after the end of the employer's tax year (treating the calendar year as the tax year if the employer does not have a tax year).