On June 29, 2016, the Internal Revenue Service issued Revenue Procedure 2016-37 denoting that service now will issue letters only to new plans, those requesting termination and in a few other circumstances, which may include significant law changes and new approaches to plan designs. That means sponsors must develop their own methods for measuring plan compliance.
A Major Change
It’s an important change, says Lori Shannon, counsel with DrinkerBiddle’s employee benefits and executive compensation team in Chicago, Illinois. “It is a change that a plan sponsor can no longer just get an updated letter after amending its plan a few times based on a cycle or based on a change in the law,” she explains. Instead, the IRS “will let you know when you can resubmit and get an updated current letter, which will consider all amendments you’ve made to the plan since the prior letter.”
Determination letters are written rulings from the IRS that an employer-sponsored retirement plan’s documents comply with the tax code’s requirements. That status is essential because plans that fail to qualify lose their tax-advantaged status, which would impose significant costs on the plan sponsor and participants.
Other parties also rely on determination letters. Banks lending to employee stock option plans want to see them. Prospective buyers of a company will want to review the most recent letter as part of their due diligence on a possible acquisition. When retirement plans merge, the letters provides assurance that the plans are not bringing any qualification problems with them. The IRS will also want to see one during plan audits and they also can be important under bankruptcy laws, says Shannon.
Over the past decade, plan sponsors typically submitted determination letter applications every five years or in the event of major change to the plan. That schedule is no longer an option. As of Jan. 1, 2017, individually designed plans can no longer request determination letters periodically. The IRS made the decision based on its assessment that it lacks sufficient resources to properly review all the letter rulings it was receiving. (This wasn’t a surprise announcement—the discontinuation plan was first announced in 2015.)
If your clients haven’t been tracking this pending change, Revenue Procedure 2016-37 provides useful guidance. Some of the key points that Shannon and San Francisco-based DrinkerBiddle associate Monica Novak discussed in a July 7, 2016, Client Alert include:
Required Amendments List. The IRS plans to publish an annual list of disqualifying provisions that arise as a result of changes in qualification requirements. This will help plan sponsors monitor required changes, says Shannon. “The plan sponsor can say, it’s an amendment, it’s on this requirement amendments list, have I made this amendment or should I talk to my consultant or legal counsel to talk about what needs to be done to my plan before the end of this plan year to ensure compliance.”
Operational Compliance List. The IRS will issue an annual list to identify changes in operational qualification requirements that take effect during a calendar year. This is a new service, Shannon notes, to help sponsors (and their consultants and legal advisors) ensure that a plan’s internal procedures are consistent with the list.
If a plan includes a disqualifying provision, it must correct the error within the remedial amendment period, i.e., a grace period. The length of that period depends on the source of the disqualifying provision, which can get technical. If the provision results from a change to the Required Amendments List, the correction generally must be made by the end of the second calendar year following the year in which the list is issued. The remedial period for disqualifying provisions that result from a plan amendment that is not on the list “generally will be the end of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later,” according to DrinkerBiddle’s Client Alert.
Shannon and Novak emphasize sponsors’ need for regular reviews to ensure compliance with the Operational Compliance and Required Amendments lists. It’s also important for existing individually designed plans to monitor future IRS guidance for the possibility of submitting a new determination letter application. It’s a different environment, but Shannon doesn’t see any major new hurdles. “I think that plan sponsors can take advantage of those (lists) on an annual basis and despite these other changes to the program, gain some level of comfort that their documents are in good shape and operationally they’re taking care of what they should take care of,” she says.