IRS Officially Ends Determination Letter Program

Revenue Procedure 2016-37, generally effective January 1, 2017, changes the Internal Revenue Service’s (IRS’) determination letter program for tax-qualified individually designed plans (IDPs), and changes the requirements for when plan amendments must be adopted under IRC Section 401(b).

Rev. Proc. 2016-37 ends the remedial amendment cycle (RAC) system and replaces it with a new approach to the remedial amendment period.

A plan can request a determination letter only if any of these apply:

• It has never received a letter before;
• The plan is terminating; or
• The IRS makes a special exception. IRS anticipates making exceptions based on program capacity to work on additional applications, and the need for rulings in certain areas. The agency said it will measure need in a variety of ways including annual input from the Employee Plans (EP) community.

An IDP’s IRC Section 401(b) remedial amendment period for required amendments will be tied to a Required Amendment List (RA List) unless legislation or other guidance states otherwise. Interim amendments will no longer be required for IDPs. The RA List is the annual list of all the amendments for which an IDP must be amended to retain its qualified plan status. IRS will publish the RA List after October 1 of each year. Generally, plan sponsors must adopt any item placed on RA List by the end of the second calendar year following the year the RA List is published. For example, plan amendments for items on the 2016 RA List generally must be adopted by December 31, 2018.

Discretionary amendments will still be required by the end of the plan year in which the plan amendment is operationally put into effect, as under Rev. Proc. 2007-44.

Rev. Proc. 2016-37 doesn’t change a plan’s operational compliance standards. Employers need to operate their plans in compliance with any change in qualification requirements from the effective date of the change, regardless of the plan’s 401(b) period for adopting amendments. To assist employers, IRS intends to provide annually an Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year.

In January, in anticipation of the elimination of the five-year RAC system for individually designed plans under the IRS Employee Plans determination letter program, the IRS issued a notice of changes. 

Industry groups and leaders contend most large retirement plans do not use prototype plan documents, and expressed concern that prototypes would not fit in certain situations, such as for plan sponsors that have multiple plans or plans with specific provisions for certain groups following a merger or acquisition.

The Employee Plans Subcommittee (EP Subcommittee) of the Advisory Committee on Tax Exempt and Government Entities (ACT) strongly urged the IRS not to end the determination letter program, but offered a recommended alternative in case the IRS had no change of heart.