A determination letter is a formal document from the Internal Revenue Service (IRS) that declares a retirement plan to be operating within the Employee Retirement Income Service (ERISA) guidelines. If the plan meets all the requirements, it becomes certified as a qualified plan and is then eligible for applicable tax benefits.
Earlier this year, the IRS released Notice 2016-03, which explains that expiration dates on determination letters that were issued prior to January 4, 2016 will no longer be applicable. This is in preparation for the 2017 changes that will result in a determination letter being applicable until the plan’s termination with few exceptions.
As a result of the IRS’s need for efficiency, new changes are coming to the determination letter for qualified retirement plans. Effective January 1, 2017, in relation to the recent IRS Announcement 2015-19, Revisions to the Employee Plans Determination Letter Program, plans will only need to apply upon initial qualification of a plan and upon the plan’s termination. A plan sponsor who amends an individually designed plan will be unable to receive an IRS opinion letter. Changes made by the amendment do not affect the tax-qualified status of the plan.
The changes coming in 2017 have a significant impact on plan sponsors. This announcement has already resulted in an immediate elimination of off-cycle determination letter applications with the exception of new plans effective July 21, 2015 through December 31, 2016. Furthermore, a qualified plan’s determination letter is relied on by auditors, used in mergers and acquisitions and by the IRS. The IRS is ultimately the entity that states a plan is tax-qualified. As a result of no longer reviewing a plan’s amendment applications, plan sponsors ostensibly have no reassurance that the IRS will discover qualification errors in the future. Ultimately, this results in an inability to rely on a plan’s determination letter especially in the case of a merger or acquisition.
Additionally, the plan sponsors will see a loss in the remedial amendment period under §401(b) which is a period where a plan can amend their plan to retroactively comply with the qualification requirements.
I expect the IRS to come out with additional clarification on the coming changes and effects on the determination letter. The ultimate impact of these changes may lessen the reliance that is placed on the determination letter held by plans.
By Sherry L. Staggs
IRS Announcement 2015-19, Revisions to the Employee Plans Determination Letter Program, https://www.irs.gov/pub/irs-drop/a-15-19.pdf
IRS Notice 2016-03, Revisions to the Employee Plans Determination Letter Program Regarding Cycle A Elections, Determination Letter Expiration Dates, and Extension of Deadlines for Certain Defined Contribution Pre-Approved Plans, https://www.irs.gov/pub/irs-drop/n-16-03.pdf