Changes to Retirement Plan Document Qualification Letters

Changes to Retirement Plan.BlogOn July 21, 2015, the IRS published plans to terminate the five-year Determination Letter Cycle process for individually designed employer retirement plans (IRS Announcement 2015-19). The move is an attempt to improve efficiencies in the face of budget cutbacks. What impact this will have on employer plans is at best uncertain. The IRS will continue to accept only Initial and Termination Determination Letter requests.  Any current determination letters that have an expiration date will move into limbo upon reaching that date, unless or until the IRS directly addresses their status at some point in the future.

Employers have come to rely heavily upon the IRS Determination Letter program for individually designed plans. A determination letter provides confirmation that the plan document, as written, complies with applicable laws. If a plan document is not in compliance with the laws and regulations, then the IRS could “disqualify” the plan. In the event of disqualification, participants are immediately taxed on their accumulated tax-deferred account balances. Additionally, the employer would need to adjust its corporate taxes to disregard the previous year’s tax deductions for company contributions to the plan. Those employers who have adopted a pre-designed prototype or Volume Submitter plan document are not impacted by this change. 

The effective date for terminating this process for individually designed plans is January 1, 2017. Originally, the IRS created the five-year cycle for plan Determination Letters as a process to allow plans to stay current with statutorily required amendments, yet only submit their documents to the IRS for review once every five years. Employers with individually designed plans are assigned to one of the five-year cycles based upon the last digit of the employer’s Employer Identification Number (EIN). Currently, the IRS is processing requests from Cycle E. Generally, single employer plans sponsored by entities whose EIN number ends with either a five or a zero may still request a letter up until January 31, 2016. The required amendments for this most current Determination Letter request are listed in IRS Notice 2014-77.

Below are suggested actions employers might want to consider:

  • Determine whether you have an individually designed plan. Check the first few pages of the plan document. If not an individually designed plan, it should state either Prototype or Volume Submitter either in the title of the plan or early on in the document. This IRS Notice impacts only individually designed plans.
  • If you are considering a plan design change, revision, or update to your current plan, now might be the time to consider whether to continue with an individually designed plan or to compare alternatives, perhaps in the form of a prototype or volume submitter plan document. Many providers offer optional designs from which to choose.
  • If the company that sponsors the individually designed retirement plan has an Employer Identification Number (EIN) whose last digit is either a 5 or a zero, the IRS will still accept and review your application for an updated Determination Letter before the program ends. Obtaining a current letter serves as confirmation that your plan document, as drafted, is in full compliance with the required laws to date.
  • Even with a current Determination Letter from the IRS, plan qualification still depends upon operational compliance with the law and the regulations. The letter itself confirms the document language is compliant, not the plan operation. For this reason, a periodic review of your plan operations to confirm benefits are administered in accordance with the language of the plan document is a wise practice. Should you uncover any errors or inconsistencies, consider whether one of the corrective programs offered by the IRS or DOL may be appropriate to protect the employer from fines, penalties, and potential plan disqualification.

Finally, remember this notice makes no change to the employer plan sponsor’s continuing requirement to ensure that their plans are compliant and the plan documents are amended as necessary to reflect the continual changes in law.  The IRS is seeking comments on this Announcement. For more information, or for instruction in how to submit comments, click here