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.
