Developments Related to Determination Letter Program For Individually Designed Plans for Governmenta Developments Related to Determination Letter Program For Individually Designed Plans for Governmenta

Developments Related to Determination Letter Program For Individually Designed Plans for Governmental Plans

As a follow-up to IRS Announcement 2015-19, on June 29, 2016, the Internal Revenue Service (IRS) issued Revenue Procedure ("Rev. Proc.") 2016-37 which further details the IRS's modification of the determination letter program for qualified plans and the elimination of the five-year remedial amendment cycle system for individually designed plans that is currently set forth in IRS Revenue Procedure 2007-44. Rev. Proc. 2016-37 is effective January 1, 2017. More recently, the IRS issued Announcement 2016-32 on September 16, 2016, to request comments on ways to improve plan qualification requirements compliance, particularly in light of Rev. Proc. 2016-37. This update details the developments arising from Rev. Proc. 2016-37.

Elimination of Five-Year Remedial Amendment Cycle System

Effective January 1, 2017, the IRS is eliminating the staggered five-year remedial amendment cycle system for individually designed plans; most governmental plans are individually designed plans. Therefore, as of that date, the IRS will no longer accept applications for determination letters based on the five-year remedial amendment cycle system. Sponsors of Cycle A plans are, however, permitted to submit applications for determination letters during the balance of the Cycle A period (February 1, 2016 through January 31, 2017).

Effective January 1, 2017, sponsors of individually designed plans will only be permitted to submit an application for a determination letter for the following:

  1. initial plan qualification (provided a favorable determination letter has never been issued for the plan),
  2. qualification upon plan termination (provided the application is filed no later than the later of: (i) one year from the plan termination's effective date, or (ii) one year from the date the action is taken to terminate the plan, but in no event later than twelve months from the date of distribution of substantially all plan assets in connection with the termination of the plan), and
  3. other circumstances as specified/determined by the IRS – such as significant law changes, new plan design approaches, and the inability of certain types of plans to convert to pre-approved (master & prototype and volume submitter) plan documents. The IRS's case load and resources will also be a significant factor in deciding what other submissions could cover. Additional situations will be announced in the Internal Revenue Bulletin ("IRB"). It is the intent of the Treasury and the IRS to periodically request comments on what should constitute appropriate additional situations. No additional situations will be accepted during the 2017 calendar year.
Consistent with these developments, the IRS issued an updated Form 5300 (June, 2016), updated Form 5300 Instructions (September 2, 2016) and a Revised Form 8717 (September, 2016).

Extension of Remedial Amendment Period for Disqualifying Provisions for Individually Designed Plans for Governmental Plans

Except as otherwise provided by statute, or by regulations or other guidance published by the IRS, the remedial amendment period for disqualifying provisions (defined below) that are first effective on or after January 1, 2016, is extended as follows for governmental plans:

  1. New plan. For a provision of a new governmental plan or the absence of a provision from a new governmental plan, the remedial amendment period for a disqualifying provision is extended to the later of: (i) in general, the 15th day of the 10th calendar month after the end of the plan's initial plan year; or (ii) 90 days after the close of the second regular legislative session of the legislative body with the authority to amend the plan that begins after the end of the plan's initial plan year.
  2. Amendment to existing plan. For an amendment to an existing governmental plan (other than an amendment due to a change in qualification requirements), the remedial amendment period for a disqualifying provision is extended to the later of: (i) the end of the second calendar year following the calendar year in which the amendment is adopted or effective (whichever is later); or (ii) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after the calendar year in which the amendment is adopted or effective (whichever is later).
  3. Disqualifying amendment to existing plan. The remedial amendment period for a disqualifying provision in a governmental plan that arises as a result of a change in qualification requirements (discussed below) is extended to the later of: (i) the end of the second calendar year that begins after the issuance of the Required Amendments List (discussed below) in which the change in qualification requirements appears; or (ii) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date of issuance of the Required Amendments List (described below) in which the change in qualification requirements appears.

A "disqualifying provision" includes a provision of a new plan, the absence of a provision from a new plan, or an amendment to an existing plan that causes the plan to fail to satisfy the requirements of the Internal Revenue Code ("IRC") applicable to the qualification of the plan as of the date the plan or amendment is first made effective. The IRS designates a plan provision as a disqualifying provision if it: (1) results in the failure of the plan to satisfy the qualification requirements of the IRC by reason of a change in those requirements that is effective after December 31, 2001; or (2) is integral to such disqualifying provision.

Extended Remedial Amendment Period Transition Rule for Individually Designed Plans

Due to the elimination of the five-year remedial amendment cycle system for individually designed plans, the extended remedial amendment period provided in Revenue Procedure 2007‑44 expires December 31, 2016. However, Rev. Proc. 2016-37 extends to December 31, 2017, the remedial amendment period for disqualifying provisions for which, as of January 1, 2017, the remedial amendment period under Revenue Procedure 2007-44 has not expired. This extension does not apply to disqualifying provisions included on the 2016 Required Amendments List.

Terminating Plans

The plan's termination ends the plan's remedial amendment period (discussed above) and, thus, generally shortens the plan's remedial amendment period. Therefore, whether or not included on a Required Amendments List, any retroactive remedial plan amendments or other required plan amendments for a terminating plan must be adopted in connection with the plan termination.

Plan Amendment Deadline

Disqualifying Provisions

In Rev. Proc. 2009-36, which modified Rev. Proc. 2007-44, the IRS acknowledged that governmental plans require more time to adopt an amendment due to legislative requirements. Rev. Proc. 2016-37 includes provisions for extended time for governmental plans to adopt such amendments.
For a disqualifying provision (discussed above), except as otherwise provided by statute, or in regulations or other guidance published by the IRS, the plan amendment deadline is the date on which the remedial amendment period with respect to such disqualifying provision (discussed above) expires.

Discretionary Amendment

For a discretionary amendment to a governmental plan, except as otherwise provided by statute, or in regulations or other guidance published by the IRS, the plan amendment deadline is the later of: (i) the end of the plan year in which the plan amendment is operationally put into effect; or (ii) 90 days after the close of the second regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date the plan amendment is operationally put into effect.

Required Amendments List

It is the intent of the Treasury and the IRS to publish a Required Amendments List annually that generally applies to changes in qualification requirements that become effective on or after January 1, 2016. The Required Amendments List establishes the date that the remedial amendment period expires for changes in qualification requirements contained on the list. In general, a Required Amendment List will not include a change to the qualification requirements until guidance regarding such change (including any model amendments) has been provided in regulations or in other guidance published by the IRS. However, the IRS may include items on a Required Amendments List in other situations, such as when a statutory change is enacted and it is anticipated that no guidance will be issued. The first Required Amendments List generally will apply to changes in qualification requirements first effective during the 2016 calendar year.

Operational Compliance List

The remedial amendment period permits a plan to be amended retroactively to comply with a change in plan qualification requirements, provided the plan is operated in compliance with such change from the effective date of the change. To assist plan sponsors with operational compliance, it is the intent of the IRS to provide an Operational Compliance List annually to identify changes in qualification requirements that are effective during a calendar year. To be qualified, however, a plan must comply operationally with each relevant qualification requirement, even if an Operational Compliance List does not include the requirement. The Operational Compliance List will be published annually. 

Scope of Plan Review

The IRS will review applications for initial determination letters for individually designed plans based on the Required Amendments List issued during the second calendar year preceding the submission of the application for determination letter. The review will also take into account all Required Amendments Lists previously issued (and Cumulative List of Changes in Retirement Plan Qualification Requirements issued prior to 2016). In other words, the review of a plan submitted for initial qualification during the 2017 calendar year, will be based on the 2015 Cumulative List (IRS Notice 2015-84).

Reliance on Determination Letters

Pursuant to IRS Rev. Proc. 2016-6, as of January 4, 2016, determination letters issued to individually designed plans will no longer contain an expiration date.

Pursuant to Notice 2016-3, expiration dates included in determination letters issued prior to January 4, 2016, are no longer operative.

In general, a plan sponsor that maintains a qualified plan which has been issued a favorable determination letter and that is otherwise entitled to rely on the determination letter may not continue to rely on the determination letter with regard to a plan provision that is subsequently amended or affected by a change in law. A plan sponsor may continue to rely on a determination letter with regard to plan provisions that are not amended or affected by a change in law.

IRS Request for Comments

Under Announcement 2016-32, the Treasury and the IRS are requesting comments on the following items:

  1. Incorporation by reference. Comments are requested on expanding the use of incorporation by reference of IRC qualification requirements in retirement plan documents.
  2. Circumstances under which plan provisions may not be required. Comments are requested as to whether a plan should be required to include certain plan provisions or amendments only if the underlying qualification requirements are applicable to that plan, taking into consideration the extent that such provisions may become applicable at a later date and the likelihood that the plan would not be amended when circumstances change.
  3. Conversion to pre-approved plans. Comments are requested on any impediments to the transition from an individually designed plan to a pre-approved plan document.
  4. Additional ways to facilitate compliance. Comments are requested on other ways to facilitate qualified plan document requirements compliance, particularly in light of Rev. Proc. 2016-37.
Comments may be submitted in writing on or before December 15, 2016. Comments should be mailed to Internal Revenue Service, CC:PA:LPD:PR (Announcement 2016-32), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044, or sent electronically to notice.comments@irscounsel.treas.gov. Please include "Announcement 2016-32" in the subject line of any electronic communications. Alternatively, comments may be hand delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (Announcement 2016-32), Courier's Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, D.C. All comments will be available for public inspection and copying.

Finally, consistent with Announcement 2016-32, Treasury and the IRS recently issued an update to the Employee Plans Compliance Resolution System ("EPCRS") revenue procedure with Rev. Proc. 2016-51 (issued on September 29, 2016). Under Rev. Proc. 2016-51, the IRS modified and superseded EPCRS and also incorporated changes which were announced with Rev. Proc. 2015-27 (which provided certain updates regarding, in part, the correction of overpayments) and Rev. Proc. 2015-27 (which addressed the correction of failures with respect to automatic contribution failures and encouraging the early correction of employee elective deferrals).

Ice Miller Comments

We note that, under IRS Announcement 2015-19 and Rev. Proc. 2016-37, the IRS has substantially limited the ability to obtain updated determination letters for qualified governmental plans. Ice Miller submitted a comment letter to the IRS regarding the impact this procedural change is likely to have on compliance efforts for the governmental retirement plan community. It will be critically important for all governmental plans to monitor federal law changes to ensure timely amendments and operational changes are completed. We continue to monitor developments from the IRS and will work with our governmental plan clients to consider what an effective and efficient approach would include.

If you have questions about Rev. Proc. 2016-37 and how it impacts your governmental plan, please contact Mary Beth Braitman, Rob Gauss, Lisa Erb Harrison, Audra Ferguson-Allen, Malaika Caldwell or the Ice Miller employee benefits attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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