IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37

Practical Law Legal Update w-002-7353 (Approx. 7 pages)

IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37

by Practical Law Employee Benefits & Executive Compensation

Individually Designed Plans and Determination Letters

Employers that adopt individually designed plans often apply for an IRS determination letter to confirm that the plan documents comply with the Internal Revenue Code (Code). Revenue Procedure 2007-44 provides procedures for issuing determination letters and describes the five-year remedial amendment cycles for individually designed retirement plans. Plan sponsors generally are permitted to apply for determination letters once every five years (for more information on IRS determination letters and the determination letter process, see Practice Note, Revised IRS Determination Letter Program for Qualified Retirement Plans).

In July 2015, the IRS issued Announcement 2015-19, which informed the public that, due to budgetary constraints, the IRS would be eliminating the staggered five-year remedial amendment cycles for individually designed retirement plans, to be replaced with another system (see Legal Update, IRS Announcement 2015-19 Changes Determination Letter Program for Individually Designed Plans).

Revenue Procedure 2016-37 and Individually Designed Plans

Revenue Procedure 2016-37:

Eliminates, as of January 1, 2017, the staggered five-year remedial amendment cycle system for individually designed retirement plans provided in Revenue Procedure 2007-44.
Provides that, effective January 1, 2017, the interim amendment requirement of Revenue Procedure 2007-44 will no longer apply to individually designed plans. This required individually designed plans to make interim amendments based on the Cumulative List of required plan changes that is published annually by the IRS.
Limits the determination letter application rules for individually designed plans by providing that a sponsor of an individually designed plan will be permitted to submit a determination letter application only for:
- initial plan qualification (that is, if it has never received a determination letter before);
- qualification upon termination of the plan; or
- other special circumstances, which the IRS will announce in published guidance in the Internal Revenue Bulletin.
Announces the intent to publish a Required Amendments List (RAL), which will establish the deadline for a plan to be amended to comply with the requirements that are identified on the list.
Extends the remedial amendment periods (RAPs) for plan provisions for both individually designed plans and pre-approved plans to correct disqualifying provisions in certain situations.
Describes the scope of review of an individually designed plan submitted for a determination letter.
Describes the extent to which plan sponsors may rely on prior determination letters.
Explains that, effective January 4, 2016, determination letters issued to individually designed plans will no longer contain expiration dates and expiration dates in letters issued before January 4, 2016 are no longer operative.
Announces the intent to publish an annual Operational Compliance List to assist plan sponsors in achieving operational compliance with the changes in qualification requirements.

Remedial Amendment Period and Required Amendments List

The IRS intends to publish annually a RAL for changes in qualification requirements that become effective on or after January 1, 2016. Plans must be amended by the expiration of the RAP included in the RAL for any changes in qualification requirements included on the RAL. Generally, a change to the qualification requirements will not appear on a RAL until the IRS has provided guidance with respect to the change.

Under the Revenue Procedure, for individually designed plans that are not governmental plans, the RAP is extended for:

New plans to the later of the 15th day of the 10th calendar month after the end of the plan's first plan year or the date determined under Treas. Reg. Section1.401(b)-1(d)(2), applied as if the employer has an extension to file its income tax return.
Amendments to existing plans that include disqualifying provisions to the end of the second calendar year after the calendar year in which the amendment is adopted or effective (whichever is later).
Amendments to existing plans that are the result of a change in qualification requirements to the end of the second calendar year that begins after the issuance of the RAP.

The Revenue Procedure also provides for a transition rule extending the RAP to December 31, 2017 for disqualifying provisions for which the RAP had not expired as of January 1, 2017 (other than those disqualifying provisions included on the 2016 Required Amendments List).

The Revenue Procedure explains that a termination ends a plan's RAP and therefore the RAP for terminating plans will be shorter than under usual circumstances. Any retroactive remedial plan amendments or other required plan amendments must be adopted in connection with the plan termination regardless of whether the requirements are included on a Required Amendments List.

Plan Amendment Deadline

Revenue Procedure 2016-37 sets out new deadlines for individually designed plans to make required plan amendments. Specifically:

For amendments implementing disqualifying provisions, the deadline is the date on which the RAP for those provisions expires.
For discretionary amendments (amendments that are not made for a disqualifying provision) to non-governmental plans, the amendment deadline is the end of the plan year in which the plan amendment is operationally put into effect. An amendment is operationally put into effect when the plan is administered consistently with the plan amendment (rather than the existing plan terms).

Revenue Procedure 2016-37 and Pre-Approved Plans

Revenue Procedure 2016-37:

Provides a description of, and clarifying changes to, the six-year remedial amendment cycle system for pre-approved plans, and extends the RAP and deadlines for adopting pre-approved plans.
Extends to April 30, 2017, the time:
- to adopt a newly approved pre-approved defined contribution plan; and
- to file for a determination letter for certain adopters of pre-approved defined contribution plans for the second six-year remedial amendment cycle.
Provides that the beginning of the 12-month submission period for master and prototype (M&P) sponsors and volume submitter (VS) practitioners to submit pre-approved defined contribution plans for opinion or advisory letters during the third six-year remedial amendment cycle is delayed until August 1, 2017.

Effective Date

Revenue Procedure 2016-37 is effective January 1, 2017. The transition rule also extends the RAP to December 31, 2017 for disqualifying provisions for which the RAP had not expired as of January 1, 2017.

Practical Implications

Sponsors of individually designed retirement plans must familiarize themselves with Revenue Procedure 2016-37 so that they can maintain the tax qualified status of their plans. Sponsors must be particularly focused on timely adopting the amendments included the Required Amendment List and the Operational Compliance List, which will both be published annually.

IRS Provides Determination Letter Guidance in Revenue Procedure 2016-37 | Practical Law