IRS Issues Guidance on Determination Letter Program

The Internal Revenue Service (IRS) has recently issued detailed guidance on the new determination letter program for tax-qualified retirement plans. In 2015, the IRS announced that, due to budgetary constraints, the program would be significantly curtailed and the staggered five-year remedial amendment filing cycles for individually designed plans (IDPs) would be eliminated. Following that announcement, the IRS solicited public comments and promised to provide detailed guidance on the future of the program.

As promised, Revenue Procedure 2016-37 makes the following significant changes to the determination letter program for IDPs as well as pre-approved plans (such as prototype and volume submitter plans):

Individually Designed Plans

• Effective January 1, 2017, a sponsor of an IDP may only submit a determination letter application for (i) initial plan qualification, (ii) qualification upon termination, and (iii) “certain other circumstances.” Examples of other circumstances include significant law changes, new approaches to plan design, and the inability of certain types of plans to convert to pre-approved plan documents. The IRS noted that its current case load and available resources will be “significant factors” in considering whether to accept submissions for such other circumstances.

• The interim amendment requirement is eliminated and replaced with an annual “Required Amendments List,” expected to be published after October of each year. Sponsors will have until the end of the second calendar year following the publication of each list to adopt all required amendments. The IRS generally will not include an amendment on the Required Amendments List until guidance has been published, which may include model amendments. The remedial amendment period to correct disqualifying provisions due to an amendment or a change in qualification requirements is extended to the end of the second year following the issuance of the relevant Required Amendments List.

• Although expiration dates on previously issued determination letters are no longer operative, sponsors may not rely on the letters with respect to any provisions that are subsequently amended or subsequently affected by any change in law.

• To assist in operational compliance, the IRS intends to provide an annual Operational Compliance List that will identify changes in qualification requirements that are effective during the calendar year.

• A one-time transition rule extends the remedial amendment period to December 31, 2017, for any disqualifying provisions for which the period has not expired by January 1, 2017.

Pre-Approved Plans

• The six-year remedial amendment cycle and the publication of cumulative lists for pre-approved plans remains intact.

• After the IRS reviews a cycle of pre-approved plans, it will announce a uniform deadline expected to provide all adopting employers a two-year window to adopt the updated plans. The closing of the window will mark the end of the remedial amendment cycle for remedial amendment periods that would otherwise end during the cycle.

• If a sponsor has a good faith failure to timely adopt an interim amendment, the remedial amendment period to correct the disqualifying provision may be extended to the end of the remedial amendment cycle.

• The beginning of the t­­hird six-year remedial amendment cycle for pre-approved defined contribution plans that would ordinarily begin February 1, 2017, will now begin August 1, 2017, and end July 31, 2018.

• The following schedule shows the second and third six-year cycles for pre-approved plans:

If you have any questions about the new IRS determination letter program, please contact one of the attorneys in the Employee Benefits & Executive Compensation group at Bradley.