The Internal Revenue Service (the IRS) recently issued Notice 2016-03 (the Notice) addressing three topics and expanding on its earlier announcement of major changes in the determination letter program for individually designed retirement plans. The Notice will likely be followed by additional guidance from the IRS, addressing features of the determination letter program.
For many years, the IRS determination letter program has allowed employers to rely on IRS determinations that the terms of a retirement plan meet the requirements for favorable tax treatment under the Internal Revenue Code (the Code). Under this program, employers with individually designed plans could generally apply for an IRS determination letter once every five years during staggered application cycles.
On July 21, 2015, the IRS announced the end of the staggered five-year application cycles for individually designed plans effective January 1, 2017 (that announcement was described in our August 4, 2015 newsletter). The IRS announcement did not address pre-approved plans but asked for comments on assistance for employers who want to convert to pre-approved plans. The Notice provides assistance to those employers.
Extended Deadline for Adoption of Pre-Approved Plans by First Time Adopters
On and after January 1, 2016, if an employer with an individually designed plan converts to a pre-approved defined contribution plan by April 30, 2017, the employer may benefit from reliance on the pre-approved plan’s opinion or advisory letter covering the six year remedial amendment period ending January 31, 2017. Before the Notice, April 30, 2016, was the deadline for adoption of a pre-approved defined contribution plan for that six year remedial period. The Notice extends the previous adoption deadline to April 30, 2017, but only for employers who first adopt a pre-approved defined contribution plan on or after January 1, 2016. For those first time adopters of pre-approved plans, the deadline to submit an IRS determination letter application is also extended from April 30, 2016, to April 30, 2017. This extension for submitting determination letter applications is likely to have limited significance because employers generally do not request determination letters for pre-approved plans.
Employers that first adopted pre-approved defined contribution plans before January 1, 2016, however, are still required to adopt a restated plan document and file for an IRS determination, if permitted, by April 30, 2016.
As we noted in our August 4, 2015, newsletter, some employers will consider transitioning from individually designed plans to pre-approved plans due to uncertainty over documentary compliance because of cutbacks in the IRS determination letter program for individually designed plans. The Notice gives employers additional time to evaluate and adopt pre-approved plans. An advantage of pre-approved plans is that adopting employers can generally rely on the favorable IRS opinion or advisory letters issued to those plans.
Determination Letter Requests by Certain Cycle A Controlled Group Filers
Provided that a Cycle A election was made no later than January 31, 2012 (the last day of the previous Cycle A submission period) for the plans sponsored by a controlled group or an affiliated service group, determination letter applications for those plans can be submitted during the Cycle A submission period beginning February 1, 2016, and ending January 31, 2017.
Expiration Dates for Determination Letters
Finally, the Notice clarifies that the expiration dates included in IRS determination letters issued prior to January 4, 2016, are no longer operative. Historically, determination letters have specified a date after which the letter could no longer be relied on. The Notice relieves concerns that the expiration dates in prior determination letters will jeopardize plan qualification, and notes that future guidance will clarify the extent to which an employer may rely on a determination letter after a subsequent change in law or plan amendment.
For employers with individually designed defined contribution plans who want to consider converting those plans to pre-approved plans, there may be an advantage in converting before April 30, 2017, to gain reliance on the pre-approved plan’s opinion or advisory letter. While pre-approved plans may in the future provide greater certainty regarding documentary compliance with legal requirements, such plans may limit flexibility with respect to plan design and could require additional documentation to implement administrative best practices and plan governance. If you would like to discuss the benefits and drawbacks of converting to a pre-approved defined contribution plan, or if you have questions about the changes to the determination letter program, please contact your regular McDermott lawyer or one of the authors of this article.