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Individually Designed Plans Due for Changes under the New IRS Determination Letter Program

Jan. 29, 2018

Effective Jan. 1, 2017, Revenue Procedure 2016-37 changed the IRS determination letter program to eliminate the five-year remedial amendment cycle for tax-qualified individually designed plans (IDP).

After Jan. 1, 2017, sponsors of IDPs are only permitted to apply for determination letters for initial plan qualification and upon the plan's termination, and in certain other circumstances that will be decided by the Treasury Department and IRS. Determination letters will still be issued for volume submitter plans or other types of pre-approved plans.

The changes could mean that determination letters for your employee benefit plan are out-of-date, particularly if your organization has an individually designed plan. A close evaluation of your plan documentation will be essential.

Background

Determination letters are issued by the IRS in response to a request from a plan sponsor as to whether a pension, profit-sharing, or stock bonus plan complies with the tax code's qualification requirements. Until the change, sponsors could request determination letters at the beginning or end of a plan, and also every five years to approve plan amendments made to comply with changes in the law.

The IRS additionally issued guidance that favorable determination letters issued before Jan. 4, 2016, no longer expire, and future favorable determination letters will no longer expire.

The prior staggered five-year remedial amendment cycle for IDPs (which determines whether plan amendments for law and guidance changes are timely adopted) is replaced by an annual Required Amendments List annually (October 1 of each year). An IDP must be amended to retain its tax-qualified plan status for each item on the list by the end of the second calendar year following the year the list is published. Discretionary amendments are required by the end of the plan year in which the amendment is operationally put into effect.

The IRS will continue to conduct examinations to assess plan compliance with plan document requirements. As a result, it will be important for IDPs to make sure they adjust to the new timing rules for required amendments to ensure that they do not inadvertently risk plan disqualification for failure to adopt amendments in time (the IRS calls this a "nonamender failure").

What Does the Change in IRS Determination Letter Program Mean for My Plan?

As a result of the previously discussed changes, plans may not have current determination letters for tax-qualified plans. Plan sponsors will need to determine if these changes have any effect on the tax-qualified status of the plan. Their employee benefit plan auditors will need to determine if the changes have any effect on the audit report (particularly relating to timely adoption of required amendments and the tax-qualified disclosure).

Although plan auditors are required to investigate the plan document relevant to determination of the plan's tax-exempt status, the plan document has typically not been an issue as the majority of plans that are subject to audit obtain determination letters or use pre-approved plans. With standardized or nonstandardized prototype plans, the overall plan sponsor generally receives an opinion letter. The sponsor of a volume submitter plan usually receives an advisory letter that is similar to an opinion letter. The remedial amendment cycle for preapproved plans (for example, prototype and volume submitter plans) is unchanged and will have a six-year cycle with the need for interim amendments. Plan sponsors may now need to obtain other evidence to support management's assertion that the IDP has retained its tax-exempt status.

Requests for an opinion letter from a plan's legal counsel on the plan document's compliance with the Internal Revenue Code qualification requirements may be one solution when current determination letters for IDPs become outdated due to changes in the law, regulations, plan operations, discretionary changes in plan terms, etc. However, in many cases the cost to the employer of obtaining such an opinion could be cost prohibitive. One possible way to minimize the cost of a legal opinion would be to limit the opinion to just new legal requirements that were enacted since the date of the last IRS determination letter.

As a result of the changes, it is possible that plan audit and legal fees could increase and/or cause delays in the completion of the plan audit. These changes may also lead plan sponsors with individually designed plans to change their plan design and adopt master and prototype plans or volume submitter plans. Plan sponsors may want to consult with their ERISA counsel or internal legal counsel for additional information.

For comments, questions or concerns about this topic, please contact Hal Hunt of MHM's Professional Standards Group. Hal can be reached at hhunt@cbiz.com or 816.945.5610.

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