The IRS announced on July 21 that, generally effective for 2017 and future years, it will no longer accept determination letter (DL) requests under the current staggered five-year remedial amendment cycles for individually designed qualified plans.(Announcement 2015-19, issued July 21, 2015). Although the five-year cycle filing process instituted by the IRS in 2007 pursuant to Rev. Proc. 2007-44 seemed to be working reasonably well for plan sponsors, the IRS has determined that in order to “more efficiently direct its limited resources,” IRS involvement in the DL process must be materially reduced. Under the approach envisioned in the announcement, DL requests would be acted on by the IRS only for new plans and plan terminations.
This IRS policy change, although significant, is not unexpected, because IRS representatives had recently discussed fairly frequently at conferences what the IRS views as a resource shortage issue regarding plan reviewers’ availability and skill-sets. The approach taken in the announcement leaves plan sponsors in uncertain territory going forward, with the likely outcome being (a) greater reliance on law firm or other professional firm opinions or (b) a shift to prototype, volume submitter, or other “pre-approved” plan documents.
A few more specific observations include the following:
- The transition period discussed in the announcement is a bit murky. The announcement formally extends the remedial amendment period through December 31, 2016, and it indicates that the commissioner “intends” to extend the remedial amendment period for individually designed plans to “a date that is expected to end no earlier than December 31, 2017.” The exact utility of the remedial amendment period to plan sponsors in the post-DL world is not clear.
- The announcement immediately (i.e., as of July 21, 2015) ends off-cycle determination letter requests (except for new plans or terminating plans).
- Although the DL process will generally be eliminated for ongoing individually designed plans as of January 1, 2017, sponsors of Cycle A plans will be permitted to submit DL applications from February 1, 2016 through January 31, 2017. This appears to be elective on the part of plan sponsors, but we imagine that most plan sponsors will choose this course.
- The announcement generates a whole raft of important practical questions. The major issue, now that the ongoing DL review process by the IRS is largely by the board, is, where do we go from here? The announcement requests comments in a number of areas, but the critical issue that sponsors of individually designed plans will face going forward is, what process or processes will provide them with the sort of reliance as to qualified status that had been provided by the IRS DL process? We think that, at a minimum, the IRS should build in some sort of reasonable reliance standard that provides protection against significant sanctions for plan sponsors that act in good faith reliance on opinions issued by qualified professional firms.
The announcement abruptly ushers plan sponsors into a new era in terms of obtaining reliable assurance that their qualified plans are indeed qualified, and we expect that plan sponsors and industry groups will have a great deal to say in response. As noted, the announcement requests comments on a number of issues, and we are happy to discuss these with you and in future blog posts.