The IRS recently announced that it will end the determination letter request process for individually designed tax-qualified retirement plans. This new regulation will go into effect Jan. 1, 2017 and affects companies and their human resources teams nationwide, as these retirement plans drafted for use by a single employer will need to be reevaluated. Let's take a look at the details of amendment:
The old way
Companies that individually create a retirement plan for their enterprises are currently able to request a DL from the IRS that expresses the agency's opinion on the arrangement, according to the IRS. The inquiry asks the IRS if the language found in the plan is appropriate and qualifies the business for favorable tax treatment, including deductions of employer contributions, deference by plan participants on income taxes on amounts contributed to the plan and contributions that grow tax deferred until they're distributed from the plan.
In the past, employers with these kind of plans could apply for a DL either every five years on an IRS predetermined on-cycle filing or through an off-cycle filing if certain requirements were met. Off-cycle filing meant that an employer submitted the plan before the last 12 months of the individual arrangement's remedial cycle. That period is usually determined by the identification number of the plan's sponsor, often the employer.
Announcement 2015-19
The issuance states that the IRS will no longer accept DL requests for the five-year remedial amendment cycle for these individual plans, including defined contribution plans with 401(k) and profit-sharing options and defined benefit pension plans. The announcement also ends off-cycle filings but allows the continuation of the current five-year cycle ending Jan. 31, 2016 and the upcoming cycle ending Jan. 31, 2017. While the end of the five-year cycle doesn't go into effect until January 2017, new off-cycle submissions were no longer accepted after July 21.
Instead, employers would be able to request a DL for only the adoption or termination of an individually designed plan. These inquiries will generally not be allowed when a current individual arrangement is ongoing.
This change is not a surprise, according to the Morgan, Lewis & Bockius, LLP, as the IRS has stated the shortage of staff and skills for plan reviews.
Next steps for employers
This change will have many effects on businesses and their HR teams. To ensure that their plans still meet tax requirements, there are several steps companies can take. First, for those enterprises with individually designed plans still on cycle, make sure to file on time.
Consider adopting a retirement plan based on a preapproved form. These arrangements are not subject to the alterations of Announcement 2015-19. Pre-approved plans are a more general retirement option, which doesn't allow your company to tailor benefits to your business goals as stringently but ensures that your plan meets code conditions.
If your business decides to stick with an individually designed plan, arrange for periodic legal counsel to evaluate your retirement arrangement and thereby guarantee that it qualifies for favorable tax treatment. It is important to keep all documents up to date for federal and legal reasons.
Lastly, businesses with pending determination letters with the IRS should contact the agency regarding the timeline of the review and include any amendments to the plan that have been put in place since the original submission. That way, the finalized DL will be completely current.
The IRS's decision to end the determination letter request process could have a significant effect on companies that rely on the approval for tax reasons. Make sure that your HR department has all the updated information on the announcement.
Share your thoughts
The IRS plans to issue additional guidance on the change and asked for comments on the rule alteration. Remarks must be submitted to the IRS in writing no later than Oct. 1 to CC:PA:LPD:PR (Announcement 2015-19), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Send electronic submissions to notice.comments@irscounsel.treas.gov. Include "Announcement 2015-19" in the subject line of any electronic communications.