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Northwest OH Legal Blog

Wednesday, July 27, 2016

Internal Revenue Service Announces Changes to Determination Letter Program for Individually Designed Retirement Plans

On June 29, 2016, the Internal Revenue Service (“IRS”) released supplemental guidance detailing anticipated changes to its determination letter program for individually designed retirement plans (“IDPs”) that are tax-qualified under the Internal Revenue Code (“Code”).  The changes are generally effective January 1, 2017.  Although IRS Revenue Procedure 2016-37 covers many changes to the IRS’s determination letter program, most of the changes relate to when an IDP—

  • must be amended for legally required changes, or
  • may request a determination letter.

Background.  IRS Revenue Procedure 2007-44 established a five-year remedial amendment cycle (“RAC”) system for IDPs that have been amended to request a determination letter from the IRS.  Under the RAC system, tax-qualified retirement plans were required, generally every five years, to adopt interim amendments for items on the IRS’s Cumulative List of Required Plan Changes.  Plan sponsors had to initially amend their plans on an interim basis by the end of the plan year in which any amendment became effective.  At the end of their five-year RAC cycle, plan sponsors would then have to make final conforming amendments to their plans.

In IRS Announcement 2015-19, the IRS stated that the RAC system was ending and that a replacement system for the Code Section 401(b) remedial amendment period would be created.  IRS Revenue Procedure 2016-37 ends the RAC system and replaces the system with a new approach to the remedial amendment period.

New Remedial Amendment Period for Individually Designed Plans.  Pursuant to IRS Revenue Procedure 2016-37, an IDP’s Code Section 401(b) remedial amendment period for required amendments will be based on a so-called “Required Amendment List” (“RA List”) that is published by the IRS, unless legislation or other guidance provides otherwise.  IDPs will no longer be required to make interim amendments.  The RA List is the annual list of all the legal changes for which an IDP must be amended to retain its tax-qualified plan status under the Code.  The IRS will publish the RA List after October 1st of each year.  Generally, plan sponsors must adopt amendments for any item on the RA List by the end of the second calendar year following the year in which the RA List is published.  For example, plan amendments for items on the 2016 RA List generally must be adopted by December 31, 2018.

Certain Legal Requirements Not Changed.  The new guidance does not affect current legal requirements applicable to discretionary amendments.  Discretionary amendments must still be adopted by the end of the plan year in which the plan amendment is operationally put into effect, as required by IRS Revenue Procedure 2007-44.

Further, IRS Revenue Procedure 2016-37 does not change a plan’s operational compliance standards.  Plan sponsors are still required to operate their plans in compliance with any change in tax-qualification requirements from the effective date of the change, regardless of the plan’s Code Section 401(b) remedial amendment period for adopting conforming amendments.  To assist plan sponsors in complying with the new requirements, the IRS intends to issue each year an Operational Compliance List.  The Operational Compliance List will identify changes in tax-qualification requirements that are effective during a calendar year.

Issuance of Determination Letters in Limited Circumstances.  Pursuant to IRS Revenue Procedure 2016-37, the IRS will issue determination letters on a limited scale.  A plan may request a determination letter only if one of the following circumstances applies:

  • The plan has never received an IRS determination letter before.
  • The plan is terminating.
  • The IRS makes a special exception for issuance of a determination letter.

The IRS anticipates making exceptions based on program capacity to handle additional applications, and the need for rulings in certain areas.  The IRS will determine the need for exceptions in a variety of ways, including annual input from the Employee Plans community.

 

Takeaways.  The changes to the IRS’s determination letter program under IRS Revenue Procedure 2016-37 will require plan sponsors to be more vigilant in making sure that their plans have been timely amended to comply with legally required changes.  The safety net provided by the five-year remedial amendment cycle under the RAC system has been supplanted by a new system that puts greater individual responsibility on plan sponsors to monitor their plans for legal compliance.  At the very least, every IDP should undergo an annual checkup to determine whether the plan needs to be amended for compliance with items on the IRS’s Required Amendment List.


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