The End of IRS Determination Letters for Retirement Plans

Mary Komornicka, CEBS AttorneyLarkin HoffmanMinneapolis, Minnesota

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Overview

IRS Rev. Proc 2016-17 Ended the 5-year cycle Limits Determination Letters to

Initial Plan establishmentPlan TerminationMaybe some other times, IRS controls

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Basic ERISA Requirement

Plan must be in writing Must include certain specific language Cannot include other specific provisions

Penalty—Loss of tax qualified status Even if the plan has operated properly at all

times

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History of Determination Letters

Date back to 1944 105,000 letters issued from 1944-1965

ERISA 1978 – 200,000 letters 1986 – 450,000 letters (TEFRA/DEFRA/REA)

Cycles established in 2007 6 year cycle for Prototype Documents 5 year cycle for Individually Drafted Documents

Timing determined by EIN

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Determination Letter Process

Complete the complex Form 5300 series User Fee IRS reviews plan document If there a required provision is absent, or

language is not acceptable, or a provision is unacceptable IRS contacts plan sponsor (attorney) Negotiation of change Remedial amendment

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Prototype Plans

Adoption Agreement & Basic Document Standardized

Any company can adopt & meet legal requirements Most restrictive

Non-standardized More options May not meet legal requirements given a specific

company’s situation Language in document has been approved by IRS Provider sponsors prototype plan document

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Adoption Agreement

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Individually Drafted

Can be totally drafted by attorney Can be a “prototype document” that has been

significantly altered Ultimate flexibility Track past plan features New plan designs

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Volume Submitter Plans

More like Prototype than Individually Drafted Language is pre-approved Can be used by multiple-employer plan Can make some changes to language without

negating pre-approved status (needs to remain “substantially identical”)

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Who Uses Which?

Individually drafted—98% of large companies Prototype plans—Almost all small companies Some plans must be Individually Drafted

ESOP Cash Balance Plans IRS in process of pre-approving versions of both

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Determination Letters

Have never been required Provide assurance that the plan document

meets all requirements AT THAT TIME Does not address whether the plan operates

properly at any time If there is an issue, given a chance to negotiate

with IRS for an acceptable change Have a period of time to adopt a fixing

amendment

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Determination Letter

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Confidence

Audit Annual plan audit IRS audits

Mergers and Acquisitions Company knows that the provisions are

proper and permitted

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Cycles

Chance every 5 years to restate the plan Pull all past amendments together Take care of any new legal requirements Address foreseeable issues in the company

New SPD Check that all required interim amendments

were properly adopted If not, chance to do a VCP

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Amendments

Discretionary Totally the choice of the plan sponsor Required by end of plan year effective

Interim Required amendments that occur between plan

restatements No longer exists for IDP; continue for prototype plans

Remedial Can be adopted after the effective date of the change in

operations

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What about the old FD letters?

Are they still good? Yes, but . . . Only for the provisions that have not been changed

by discretionary amendment or by change in law/regulations

What about the expiration date? Can I file for one now before the door shuts?

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What Is Changing?

Individually Drafted Plans Required Amendment List

Prototype Plans Operational Compliance List

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Required Amendments List

Annual RAL (by Oct. 1) List new requirements and effective dates

Model language Must operate in compliance with any new

requirements as of the effective date Have until end of the 2nd calendar year following

the year that the change showed up on the RAL to adopt the change

But the amendment must be in sync with the operation of the plan during that period

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RAL Example

2016 RAL lists requirement that entry dates must be at least quarterly Not really, this is a hypothetical example

Effective date January 2017 Company has until end of 2018 to amend plan Company must conform as of January 2017 Company decides to use monthly entry dates in 2017 Amendment in Dec. 2018 cannot move to quarterly

entry dates for 2017 and 2018; but could in 2019

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Prototype Plans

Pre-approved language and options Six year cycle Still in effect IRS is in process of approving

Defined Benefit Cash Balance Prototypes ESOPS

Current DC cycle required restatement by April 30, 2016 But you can still get on-board

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Operational Compliance List

New from the IRS For Prototype Plans Annual list of required changes

May not be complete

May need an “interim” amendment

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Interim Amendments

Must be in operational compliance with all requirements

Timing for amendment May be required to adopt between the six-year cycle IRS provides specific requirements for each issue

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What Does It Matter?

Why do I care? What do I need to do?

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Impact

Existing IDP Have a favorable determination letter “FDL” No expiration date (now)

Change to a different IDP (or restate) New risk—Old FDL won’t apply Can’t apply for new one

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Impact

Existing IDP Need to watch the Required Amendment List each

year What items impact that plan? Need to make timely amendment

In addition to any discretionary amendments

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Impact

IRS Audit Can find issues with an amendment made many

years back Auditors Rely on the FDL to state that the plan is

“qualified” Participant rollovers Had been the “clean bill of health” to accept

any rollover

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Impact

Mergers and Acquisitions Will any company merge an acquired company’s

plan into their plan?

VCP and ACP filings FDL has been required, unclear what happens now

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Impact

Investment providers Collective trust funds Private investment funds only open to qualified plans

Bankruptcy Retirement Plan assets are protected if in a qualified

plan Bankruptcy courts have often used the FDL as proof

that the plan is qualified Now what?

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Can I Move To A Prototype Plan?

Yes, extended period April 30, 2017 Can rely on document until next prototype

cycle 2022 or 2023

But remember, the plan may not fit onto the prototype document Different prototype documents Providers are generally the sponsors

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Poor Fit for Prototype Plans

Mergers and Acquisitions Track historical elements of acquired, merged

plans Need to have different benefit or vesting

structures for different companies Subsidiaries Different Plan features

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Determination Letter Upon Termination Provides a “Book End” to plan Plan document is in compliance at the end

Must be current with all applicable laws, even if required date to amend is in the future.

If IRS came to audit in 2 years, wouldn’t have risk of needing to amend the plan that is terminated

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Determination Letters Upon Plan Termination But

Does not guarantee a clean audit since it does not address the operational status of the plans

Cost Time

Several monthsNo Control/InfluenceCannot distribute until receive the letter

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Action Steps

Annual compliance review upon release of RAL and OCL

Review plan documents regarding the RAL Keep SDP current Talk with plan auditors to see if there is an issue

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Questions

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