1/3/17

Labor and Employment Alert: Are Individually Designed Retirement Plans an Endangered Species? Impact of Changes to the IRS Determination Letter Program

Related Practices

Attorneys & Professionals

In January 2017, the last regular determination letter applications will be filed for sponsors of individually designed retirement plans.  After that last Cycle A determination letter application, individually designed plans will no longer be able to get a ruling from the IRS that the plan terms comply with law (except for the initial ruling on formation of the plan and a final ruling at plan termination), although the IRS may specify other ruling opportunities in the future.

Individually designed plans have historically been used where plans have unusual terms that simply can’t fit within the pre-approved structure of a prototype or volume submitter plan document. 

The IRS will continue to issue opinion letters to prototype and volume submitter plans.  The drastic change to the determination letter program means that there may be some incentives for plan sponsors to move onto a pre-approved plan.

Why did plan sponsors file determination letter applications?

Determination letters are not “mandatory” but they provided several benefits for plan sponsors:

  1. The determination letter process allowed a plan to identify and retroactively fix plan text that an IRS agent believes does not comply with the statutory and regulatory requirements. Otherwise the plan could only be amended prospectively and would technically be disqualified during the interim period. 
  2. A determination letter had been a pre-condition to use of the EPCRS correction program. 
  3. Many auditors, lenders and other third parties with whom transactions are being negotiated have historically asked for a representation the plan has a valid determination letter. This bypassed extensive diligence regarding the potential disqualification risk. 

Timing for plan amendments

The IRS rules apply different deadlines for plan amendments depending on the type of amendment:

Annual Process Changes

Each year, the IRS will issue two lists: (1) a “Required Amendments List” and (2) an “Operational Compliance List.” 

The Required Amendments List will list the applicable changes in law.  Under the new process, a plan sponsor must amend its plan to comply with the new requirement no later than the end of the second calendar year following the calendar year in which the amendment first appears on the Required Amendments List.  If a plan amendment is adopted that does not comply with law, the plan sponsor must adopt a revised amendment correcting the issue no later than the end of the second calendar year after the later of the dates the amendment is adopted or effective.

Even though the documentation of some amendments may be delayed, the plan is required to operate in compliance with law changes from the effective date of the rule change.  The annual “Operational Compliance List” will identify changes in qualification requirements that are effective during a calendar year.

Action Steps for Plan Sponsors of Individually Designed Plans

As a result of the IRS’ changes to its determination letter program, we recommend plan sponsors take the following actions: