June 10, 2015
New IRS Guidance Indicates Changes to Determination Letter Program
Through the release of Revenue Procedure 2015-36 on June 8, the Internal Revenue Service (IRS) has outlined changes to the determination letter program for pre-approved retirement plans – including Employee Stock Ownership Plans (ESOPs) and cash balance plans, in the pre-approved plan process for the first time. These changes, along with a reduction in the number of employers necessary to adopt a pre-approved plan in order to obtain a pre-approved plan determination letter, could make pre-approved plans available to more employers.
Very generally, when a retirement plan is established, the plan’s sponsor may obtain a determination letter from the IRS affirming that the plan meets the requirements for qualification. A plan is then assigned to a group for cyclical remedial amendment periods, during which required and voluntary changes can be made and the plan is “determined” to still be qualified. Individually designed plans are on a staggered five-year remedial amendment period based on the last digit of their employer identification number. Determination letter filings for preapproved plans are on a set six-year cycle (all preapproved defined contribution plans are filed in one year of the cycle and all preapproved defined benefit plans are filed in another year). Plans can also seek a determination letter at the time a plan is being terminated.
This process is governed by a vast array of IRS revenue procedures including IRS Rev. Proc. 2011-49, which was revised by Rev. Proc. 2015-6 in January to reflect the shift in technical responsibility from the agency’s Tax Exempt and Government Entities (TE/GE) Division to the Office of Associate Chief Counsel.
Rev. Proc. 2015-36 further modifies and supersedes Rev. Proc. 2011-49 while also extending (to October 30, 2015) the deadline for submitting on-cycle applications for opinion and advisory letters for pre-approved defined benefit plans for the plans’ second six-year remedial amendment cycle. (This extension applies to pre-approved defined benefit mass submitter lead and specimen plans, word-for-word identical plans, master and prototype minor modifier placeholder applications, and defined benefit non-mass submitter plans.)
The changes to Rev. Proc. 2011-49, spelled out in detail in Section 3, relate largely to the treatment of employee stock ownership plans (ESOPs) and cash balance plans. Important changes include:
- Extending the application deadline for pre-approved defined benefit plans from June 30 to October 30, 2015.
- Opening the pre-approved plan program to cash balance plans for submission by October 30, 2015.
- Expanding the pre-approved plan program to ESOPs during the defined contribution application period beginning February 1, 2017.
Concurrent with Rev. Proc. 2015-36, the IRS has also released Listings of Required Modifications (LRMs), which function as sample language for pre-approved cash balance plans and ESOPs.
These changes could be particularly significant if the IRS eliminates most determination letters for individually designed plans (those that are not operating under a pre-approved vendor-sponsored master and prototype or volume submitter plan document), as the agency has informally indicated it is considering.
The agency is expected to solicit public comment on potential changes to the determination letter process in the coming months. For more information on the IRS determination letter program, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.