The Internal Revenue Service (IRS) announced changes to the determination letter program for individually designed qualified plans in IRS Announcement 2015-19 and IRS Notice 2016-03, which we have discussed in prior posts. In our June 2016 we described the report made to the IRS by the Advisory Committee on Tax Exempt and Government Entities, which provided recommendations to the IRS regarding changes to the determination letter program.

The IRS issued Revenue Procedure 2016-37 on June 29, 2016, which clarifies, modifies and supersedes Revenue Procedure 2007-44 and is generally effective January 1, 2017.  Revenue Procedure 2016-37 provides additional guidance on changes to the determination letter program and ongoing plan compliance, extends the remedial amendment period for individually designed qualified plans, revises the remedial amendment cycle system for pre-approved qualified plans in accordance with the changes made to the determination letter program and delays the beginning of the 12-month submission period for pre-approved qualified plans to request opinion and advisory letters. This Client Alert addresses the modifications to the determination letter program and ongoing compliance for individually designed qualified plans. A subsequent post will address the modifications in Revenue Procedure 2016-37 that apply to pre-approved qualified plans.

Key Points for Individually Designed Qualified Plans:

• The current five-year determination letter program for individually designed qualified plans described in Revenue Procedure 2007-44 is eliminated effective January 1, 2017, consistent with prior recent IRS guidance.

• Effective January 1, 2017, sponsors of individually designed qualified plans may submit determination letter applications only for initial plan qualification, qualification on plan termination and certain other circumstances to be determined annually by the IRS.

• The IRS intends to publish annually a “Required Amendments List” of disqualifying provisions that arise as a result in a change in qualification requirements.

• The remedial amendment period for a disqualifying provision related to a change in qualification requirements which is on the Required Amendments List generally will be the end of the second calendar year following the year the list is issued.

• The remedial amendment period for a disqualifying provision related to an amendment to an existing plan which is not on the Required Amendments 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.

• To assist plan sponsors with operational plan compliance, the IRS intends to issue an Operational Compliance List annually to identify changes in qualification requirements that are effective during a calendar year.

Elimination of the Five-Year Remedial Amendment Cycle

Effective January 1, 2017, the staggered five-year remedial amendment cycle system for individually designed plans is eliminated. Cycle A plans (plan sponsors with employer identification numbers ending in 1 or 6) may submit determination letter applications during the period beginning on February 1, 2016, and ending on January 31, 2017. Controlled groups and affiliated service groups that maintain one or more plan may submit determination letter applications for such plans during Cycle A in accordance with prior valid Cycle A election(s). Also effective January 1, 2017, individually designed plan sponsors are no longer required to adopt interim plan amendments as described in Revenue Procedure 2007-44 with adoption deadlines on or after such date.

When May a Determination Letter Application Be Submitted?

• Initial Plan Qualification.  A plan sponsor may submit a plan for initial plan qualification on a Form 5500 if a favorable determination letter has never been issued for the plan.

• Qualification Upon Plan Termination.  A plan sponsor may submit a plan to obtain a favorable determination letter upon plan termination if the filing is made no later than the later of (i) one year from the effective date of the termination; or (ii) one year from the date on which the action terminating the plan is taken, but in any case not later than 12 months after the date that substantially all plan assets have been distributed in connection with the plan termination.

• Other Circumstances.  The IRS will consider annually whether determination letter applications will be accepted for individually designed plans under circumstances other than initial qualification or plan termination. Factors that may affect such consideration include:

  • Significant law changes

  • New approaches to plan design

  • Inability of certain plans to convert to a pre-approved format

  • IRS case load and resources available to process applications

Additional situations in which plan sponsors will be permitted to request determination letters will be announced in the Internal Revenue Bulletin. Comments will be requested on a periodic basis as to the additional situations in which a determination letter application may be appropriate. The only determination applications that will be accepted during the 2017 calendar year are for initial plan qualification, qualification upon plan termination and Cycle A submissions.

Extension of Remedial Amendment Period

Generally, a disqualifying provision is a provision or the absence of a provision in a new plan or a provision in an existing plan that causes a plan to fail to satisfy the requirements of the Internal Revenue Code (Code) as of the date the plan or amendment is first effective. Additionally, a disqualifying provision includes a plan provision that has been designated by the IRS as a disqualifying provision by reason of a change in those requirements. For disqualifying provisions that are first effective on or after January 1, 2016, the remedial amendment period for plans (other than governmental plans) is extended as follows:

• New Plan.  The remedial amendment period ends the later of (i) the 15th day of the 10th calendar month after the end of the plan’s initial plan year; or (ii) the “modified Code Section 401(b) expiration date.”

• Amendment to Existing Plan.  The remedial amendment period for a disqualifying provision (other than those in the Required Amendments List) is the end of the second calendar year after the amendment is adopted or effective, whichever is later.

  • Plan Not Maintained by a Tax-Exempt Employer: The modified Code Section 401(b) expiration date is generally the due date for the employer’s income tax return, determined as if the extension applies.

  • Plan Maintained by a Tax-Exempt Employer: The modified Code Section 401(b) expiration date is generally the due date for the Form 990 series, determined as if the extension applies or, if no Form 990 series filing is required, the 15th day of the 10th month after the end of the employer’s tax year (treating the calendar year as the tax year if the employer has no tax year). 

• Change in Qualification Requirements.  The remedial amendment period for a disqualifying provision that relates to a change in qualification requirements is the end of the second calendar year that begins after the issuance of the Required Amendment List on which the change in qualification requirements appears.

Example: Remedial Amendment Period for Amendment to an Existing Plan.

Employer maintains an individually designed plan that received a favorable determination letter in 2014.  Effective January 1, 2018, Employer amends the plan’s vesting schedule. The plan amendment, which is signed on January 1, 2018, results in a disqualifying provision. During its annual plan compliance review in March 2019, Employer realizes that the plan amendment resulted in an impermissible vesting schedule. To maintain the plan’s qualification, Employer must: (i) adopt a remedial amendment to correct the disqualifying plan provision no later than December 31, 2020 – the last day of the second calendar year after the plan amendment was adopted and effective; (ii) make the remedial amendment retroactively effective as of January 1, 2018; and (iii) correct the plan’s operation to the extent necessary to correct the disqualifying provision.

Example: Remedial Amendment Period for Change in Qualification Requirements.

Employer maintains an individually designed plan with a calendar year plan year. The IRS publishes guidance in the Internal Revenue Bulletin in July 2016 that changes a qualification requirement under the Code. The guidance, which is effective for the first plan year beginning on or after January 1, 2017, is included on the 2017 Required Amendments List (issued in December 2016). To maintain the plan’s qualification, Employer must: (i) adopt an amendment to the plan reflecting the guidance no later than December 31, 2019 – the last day of the second calendar year that begins after the issuance of the Required Amendments List on which the qualification change appear; and (ii) ensure that the plan is operationally compliant with the guidance as of January 1, 2017.

Note that the remedial amendment periods differ for new and existing plans of governmental entities.

Extended Remedial Amendment Period Transition Rule

The remedial amendment period for certain disqualifying provisions identified in Revenue Procedure 2007-44 was set to expire as of December 31, 2016, as a result of the elimination of the five-year remedial amendment cycle system. The remedial amendment period for such provisions is extended to December 31, 2017, except that with respect to any disqualifying provision that is on the 2016 Required Amendments List, the remedial amendment period will end on the last day of the second calendar year that begins after the issuance of the Required Amendments List.

Terminating Plans

Generally, the termination of a plan ends the plan’s remedial amendment period. Retroactive remedial plan amendments or other required plan amendments must be adopted in connection with the plan termination even if such amendments are not on the Required Amendments List.

Plan Amendment Deadline

For disqualifying provisions, the plan amendment deadline is generally the date on which the remedial amendment period expires, unless otherwise provided. For discretionary amendments (i.e., any amendment not related to a disqualifying provision) to any plan that is not a governmental plan, unless otherwise provided, the amendment deadline is the end of the plan year in which the amendment is operationally put into effect. An amendment is operationally put into effect when the plan is administered in a manner consistent with the intended plan amendment (rather than existing plan terms).    

Required Amendments List

The Treasury and IRS intend to publish a Required Amendments List annually, beginning with changes in qualification requirements that become effective on or after January 1, 2016. The Required Amendments List will provide the date that the remedial amendment period expires for changes in qualification requirements. An item will appear on the Required Amendments List after guidance (including any model amendment) has been provided in regulations or in other guidance published in the Internal Revenue Bulletin, except as otherwise determined at the discretion of the IRS.

Operational Compliance List

The deadline for amending a plan retroactively to comply with a change in plan qualification requirements is the last day of the remedial amendment period.  However, a plan must be operated in compliance with a change in qualification requirements as of the effective date of the change. The IRS intends to issue annually an Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year. The Operational Compliance List is intended to assist plan sponsor in operational compliance, but plan sponsors are required to comply with all relevant qualification requirements, even if not on the list. 

Scope of Plan Review

The IRS will review plans submitted with determination letter applications based on the Required Amendments List issued during the second calendar year preceding the submission of the application. The review will consider all previously issued Required Amendments Lists (and Cumulative Lists prior to 2016). Terminating plans will be reviewed for amendments required to be adopted in connection with plan termination.  Plans submitted for initial qualification in 2017 will be reviewed based on the 2015 Cumulative List. With the exception of a terminating plan, individually designed plans must be restated to incorporate all previously adopted amendments when a determination letter application is submitted.

Reliance on Determination Letters

As provided in Revenue Procedure 2016-6, effective January 4, 2016, determination letters issued to individually designed plans no longer contain expiration dates, and expiration dates in determination letters issued prior to January 4, 2016, are no longer operative. A plan sponsor that maintains a qualified plan for which a favorable determination letter has been issued and that is otherwise entitled to rely on the determination letter may not continue to rely on the determination letter with respect to a plan provision that is subsequently amended or is subsequently affected by a change in law. However, the plan sponsor may continue to rely on such determination letter for plan provisions that are not amended or affected by a change in the law.

Action Steps for Sponsors of Individually Designed Qualified Plans

• Conduct an annual compliance review to assess compliance with the current Operational Compliance List and correct any failures detected in accordance with the IRS guidance. 

• Periodically conduct a more in depth compliance review to assess compliance with all prior Operational Compliance Lists.

• Review plan documents annually to assess compliance with the current Required Amendments List and determine whether plan amendments are required within the applicable remedial amendment period.

• Review plan documents annually to determine whether all discretionary plan amendments have been timely adopted.

• For any new individually designed qualified plan, determine the timing of the IRS submission request for an initial favorable determination letter.

• For any terminating individually designed qualified plan, determine: (i) whether a favorable determination letter will be requested in connection with the plan termination; (ii) whether plan amendments are required in connection with the plan termination; and (iii) the timing of the submission to the IRS for a favorable letter on the qualification upon plan termination.

• Annually, determine whether an IRS submission is permissible for an existing individually designed qualified plan, based on current IRS guidance.