IRS Finalizes New Employee Plan Determination Letter Procedures
September 6, 2005
The Internal Revenue Service (IRS) recently finalized procedures for a new system of staggered remedial amendment periods and new procedures for retirement plan sponsors seeking IRS approval of amendments to file determination letters to ensure tax code compliance. With Revenue Procedure 2005-66, the IRS has set forth new procedures that include five-year staggered cycles for individually designed employee plans to file determination letters with the IRS and six-year staggered cycles for sponsors of pre-approved plans (master and prototype (M&P) and volume submitter plans) to file opinion, advisory or determination letters, with employers having approximately a two-year window to adopt their updated pre-approved plans. The new procedures also extend the remedial amendment period for compliance with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to the end of a plan’s initial applicable cycle for both individually designed and pre-approved plans. Thus, for employers sponsoring individually designed plans in the opening cycle, the IRS will begin accepting determination letter applications on February 1, 2006, but the EGTRRA remedial amendment period will last until January 31, 2007.
Five-Year Staggered Cycles for Individually Designed Plans
Under the new determination letter program, every individually designed employee plan will have a five-year remedial amendment period. The IRS’s goal is to create fixed, regular cycles for the adoption of remedial plan amendments under section 401(b) of the Internal Revenue Code (the Code) and the submission of determination letter applications.
Remedial Amendment Period Extended to the End of the Remedial Amendment Cycle
Plan sponsors of individually designed plans will generally be able to rely on a favorable determination letter for their plans for the duration of the five-year cycle (until the end of the determination letter’s "expiration date"), provided the plan sponsor applies for a new determination letter no later than the last 12-month period of each five-year cycle. The new procedures extend the end of the remedial amendment period for disqualifying provisions under section 401(b) to the end of the cycle in which the remedial amendment period would otherwise end. Plan sponsors will have until the end of the five-year cycle to amend the plan to correct a disqualifying provision, provided the amendment is made retroactively effective and the plan has been in operational compliance with the amendment provisions beginning on the retroactive effective date. Plan sponsors may also be required to adopt interim, good faith plan amendments to account for legislative or guidance changes before the end of their five-year remedial amendment cycles, as discussed in more detail below.
The IRS will publish annually the Cumulative List of Changes in Plan Qualification Requirements to identify changes required by the end of a plan’s cycle. Near the end of 2004, the IRS published Notice 2004-84, which contained the 2004 Cumulative List of Changes in Plan Qualification Requirements. In addition to changes and requirements identified in each year’s Cumulative List, the IRS will consider in review of determination, opinion or advisory letter applications all qualification requirements in effect, or guidance published, before the issuance of the Cumulative List.
Cycles Based on Plan Sponsor’s EIN
The five-year remedial amendment periods are staggered over a five-year period, based generally upon the employer identification number (EIN) of the employer that maintains the plan. The following chart shows how a plan’s five-year cycle is determined, along with the EGTRRA remedial amendment period extension for each cycle.
|
If the EIN of the employer ends in ___ |
The plan’s cycle is: |
The last day of the EGTRRA remedial amendment period (i.e., the first cycle) is: |
The next five-year remedial amendment cycle ends on: |
|
1 or 6 |
Cycle A |
January 31, 2007 |
January 31, 2012 |
|
2 or 7 |
Cycle B |
January 31, 2008 |
January 31, 2013 |
|
3 or 8 |
Cycle C |
January 31, 2009 |
January 31, 2014 |
|
4 or 9 |
Cycle D |
January 31, 2010 |
January 31, 2015 |
|
5 or 0 |
Cycle E |
January 31, 2011 |
January 31, 2016 |
For multi-employer plans under section 414(f) of the Code, the plan’s five-year remedial amendment cycle will be Cycle D. For multiple employer plans, the cycle will be Cycle B. For plans maintained by multiple members of a controlled group under section 414(b) or (c) or an affiliated service group under section 414(m), the plan’s five-year remedial amendment cycle will generally be determined by the last digit of the EIN that is or will be used to report the plan on Form 5500. However, special rules, provide for an election for all plans maintained by any members of a controlled group to use Cycle A for all plans. In the case of a parent-subsidiary organization, an election may be made to have the cycle determined by reference to the EIN of the parent. Elections must be filed with the first determination letter application that is submitted in accordance with these new procedures for any plan maintained by any member of the controlled group or parent-subsidiary organization.
Special rules also apply for plans maintained by an employer as a result of a merger or a spin-off. If plans with different five-year remedial amendment cycles (i) are merged, (ii) one employer acquires another employer and maintains its plan, (iii) a portion of a plan is spun off, (iv) there is a change in the EIN or (v) there is a change in the controlled group status or affiliated service group status, the five-year remedial amendment cycle will be determined on the basis of the employer that maintains the plans thereafter. An affected plan’s current five-year remedial amendment cycle may be lengthened or shortened as a result. If an affected plan’s cycle is shortened such that it becomes less than 12 months, the IRS will allow the affected plan’s cycle to be extended for 12 months with the next five-year cycle shortened accordingly. In addition, plans that terminate must adopt any retroactive remedial plan amendments (any other required amendments) in connection with the plan’s termination.
On-Cycle Filing Preserves Reliance on a Determination Letter
To preserve reliance on a plan’s favorable determination letter, it will be important for plan sponsors of individually designed plans to stay "on-cycle." New determination letters should be applied for during the last 12 months of a plan’s remedial amendment cycle, i.e. between February 1 and January 31 before the end of the plan’s cycle. Determination letters issued on-cycle will come with a specific "expiration date" at the end of the five-year cycle. If an application for a determination letter is filed "off-cycle," the letter may not take into account any or all of the changes in qualification requirements for which the plan must be amended within the plan’s remedial amendment cycle. As a result, the letter may not be relied on after the end of the remedial amendment cycle, the plan may need to be further amended within the cycle and another determination letter will likely be needed to be filed "on-cycle" if the plan sponsor wishes to preserve reliance on a determination letter.
Operational Compliance and Interim Amendments Still Required
Even though plan sponsors have until the end of the remedial amendment period to adopt retroactive plan amendments, plans must still be in operational compliance with written plan documents, including any interim amended plan provisions, which may have a retroactive effective date. Interim plan amendments will still be necessary when there are statutory or regulatory changes with respect to plan qualification requirements that will impact provisions of the written plan document. The adoption of an interim plan amendment will generally be required by the end of the plan year that includes the date on which the change becomes effective with respect to the plan or the due date for filing the income tax return for the employee’s taxable year for that year, for plans maintained by one employer.
It is also important to note the new procedures do not alter the requirements of Code section 411(d)(6), which prohibits a plan amendment that decreases a plan participant’s accrued benefits or has the effect of eliminating or reducing an early retirement benefit or retirement-type subsidy, or an accrued optional form of benefit.
Pre-Approved Plans (Master and Prototype and Volume Submitter Plans)
Sponsors of master and prototype and volume submitter plans will generally have to apply for new opinion or advisory letters once every six years. The cycles will begin in 2006 for defined contribution plans and 2007 for defined benefit plans. Once the IRS approves a plan document, employers that wish to adopt the plan will have approximately a two-year period in which to do so. The IRS will review and determine this period at a later date. But, like sponsors of individually designed plans, the end result will be that employers adopting pre-approved plans will have to adopt an updated plan approximately every six years.
Recommendation
Sponsors of individually designed plans and pre-approved plans, as well as employers that adopt pre-approved plans, should evaluate the effects of the new determination letter cycles and the extension of the EGTRRA remedial amendment period on their plan.
