Category: Qualified Plans

IRS Announces Significant Reduction in Determination Letter Program

On July 21, 2015, the IRS announced changes to the favorable determination letter program for qualified retirement plans. Employers that sponsor individually designed plans should take a close look at whether they can state their plans on a pre-approved plan document, particularly a volume submitter document, for the reasons explained in this post.

Most significantly, the IRS will eliminate the staggered 5-year determination letter remedial amendment cycles for individually designed plans as of January 2017. This means that, effective as of January 1, 2017, sponsors of individually designed plans will only be permitted to submit a determination letter application for qualification in two circumstances:

  • upon initial plan adoption; and
  • upon plan termination.

In addition, effective immediately, the IRS will no longer accept determination letter applications for individually designed plans that are submitted off-cycle, except for new plans and for terminating plans.

Implications for Plan Sponsors

These changes to the determination letter program increase the risk that document failures may get into, and remain for a long period of time in, plan sponsor’s qualified retirement plans. For example, a failure to adopt a required amendment to the plan document, which ordinarily would have been discovered and corrected in connection with the staggered 5-year determination letter remedial amendment cycle, could now persist for years or even decades before being discovered. Plan terminations will likely become more difficult, time consuming and costly if such errors are not discovered until the Plan submits for a favorable determination upon termination.

Plans that are stated on a pre-approved document (such as a volume submitter or prototype plan document) will continue to receive IRS opinion letters on the language in those plans. In addition, plan sponsors who adopt a volume submitter plan and make limited modifications to the approved specimen plan, which does not create an individually designed plan, will still be able to get a favorable determination on their plans every six years. These plans will thereby avoid the above risks.

For this reason, employers that sponsor individually designed plans should closely evaluate whether they can convert their plans to a pre-approved plan document, with a goal of completing the transition by January 1, 2017. Many individually designed plans may be able to fit onto a volume submitter plan with minor modifications, which will allow those sponsors to continue receiving a favorable determination lettre on their plan every six years.

Additional Guidance Expected from the IRS

The IRS has asked for comments, and expects to issue further guidance, regarding how it can assist plan sponsors that wish to convert individually designed plans to pre-approved plans.

We should also expect some changes to the IRS’s EPCRS correction program, to help correct errors that inevitably will increase as a result of this curtailment in the favorable determination letter program.

In addition, the IRS is considering ways to make it easier for plan sponsors that continue to sponsor individually designed plans to comply with the qualified plan document requirements, including:

  • providing model amendments,
  • not requiring certain plan provisions or amendments to be adopted if and for so long as they are not relevant to a particular plan (for example, because of the type of plan, employer, or benefits offered),
  • or expanding plan sponsors’ options to document qualification requirements through incorporation by reference.

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IRS Ends Lump Sum Risk Transferring Programs in Defined Benefit Plans

Treasury Department and the IRS announced today in Notice 2015-49 that they intend to amend the required minimum distribution regulations under Code Section 401(a)(9) to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan.

The revised regulations will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution. These amendments to the regulations will apply as of July 9, 2015.

Background

Section 401(a)(9) prescribes required minimum distribution rules for a qualified plan under Code Section 401(a). Under the regulations, a defined benefit pension plan cannot permit a current annuitant to convert their annuity payments to a lump sum or otherwise accelerate those payments, except in a narrow set of circumstances specified in the regulations, such as in the case of retirement, death, or plan termination. In addition, the regulations permit annuity payments to increase “[t]o pay increased benefits that result from a plan amendment.”

A number of defined benefit plan sponsors have amended their plans pursuant to this “plan amendment” exception to provide a limited period during which certain retirees who are currently receiving joint and survivor, single life, or other life annuity payments from those plans may elect to convert that annuity into a lump sum that is payable immediately. These arrangements are sometimes referred to as lump sum risk-transferring programs because longevity risk and investment risk are transferred from the plan to the retirees.

In 2012, the IRS issued Private Letter Rulings to General Motors and Ford specifically approving such programs for those companies. See PLR 201228045 and PLR 201228051. While Private Letter Rulings do not apply to anyone other than the person to whom they are issued, many employers found support in those PLRs for their risk transfer programs. With the change in the regulations announced today, those PLRs no longer provide any support.

Conclusion

The Treasury Department and the IRS have concluded that a broad exception for increased benefits that would permit lump sum payments to replace rights to ongoing annuity payments (of the kind approved in the two 2012 PLRs) would undermine the intent of the required minimum distribution regulations. Therefore, the exception for changes to the annuity payment period provided in the regulations (as intended to be amended) will not permit acceleration of annuity payments to which an individual receiving annuity payments was entitled before the amendment, even if the plan amendment also increases annuity payments.

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IRS Expands Pre-Approved Plan Document Program to Include Cash Balance Plans and ESOPs

On June 8, 2015, the IRS issued Revenue Procedure 2015-36, which announces the IRS expansion of its pre-approved plan program to include cash balance plans and employee stock ownership plans (ESOPs). With this expansion, master & prototype and volume submitter plan providers can apply for opinion and advisory letters for cash balance plans by October 30, 2015, and for ESOPS during the defined contribution application period beginning February 1, 2017.

While this presents opportunities for ESOP sponsors to streamline their plan documentation, it is not without risks. As Cindy Shupe warned back in 2013, use of pre-approved documents can increase the risk of non-compliance if plan sponsors assume that use of a pre-approved document will ensure compliance with the complicated ESOP financing and prohibited transactions rules. Therefore, while we encourage ESOP sponsors to consider adopting a pre-approved plan document in the next cycle, we also encourage early conversations with ERISA counsel to evaluate the viability and implications of doing so. In addition to the above compliance issues, Employers currently maintaining individually designed ESOPS that intend to adopt a pre-approved plan (when available) will need to complete Form 8905, Certification of Intent To Adopt a Pre-approved Plan, before the end of their plan’s current 5-year remedial amendment cycle.

DOL Provides Timing Relief for Fee Disclosures in Participant-Directed Individual Account Plans

On March 19, 2015 the Department of Labor issued final rules that give retirement plan administrators a two-month window in which to provide annual fee disclosures to plan participants. Under existing regulations, plan administrators must provide fee disclosures to participants in plans with individually directed accounts at “at least once in any 12-month period, without regard to whether the plan operates on a calendar or fiscal year basis”. This 12-month rule presents some administrative difficulty because Plans that provide the disclosures in the same month every year could easily run afoul of the regulatory language if their disclosures are not done on the exact same day of the month each year.

The new rule replaces “12-month period” with “14-month period”, giving plan administrators a two month window each year in which to make the disclosures The new rules will become effective on June 17, 2015 (unless the DOL gets significant adverse comments on the rule, which is not expected). In the meantime, the DOL indicates that for enforcement purposes plan administrators can rely on the new rule immediately.

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