Retirement Plans Face New Challenges to Demonstrating Compliance Retirement Plans Face New Challenges to Demonstrating Compliance

Retirement Plans Face New Challenges to Demonstrating Compliance

Jan. 1, 2017, marked the close of an era for qualified retirement plans and compliance collaboration with the Internal Revenue Service. The IRS largely ended its determination letter program for individually designed qualified retirement plans. The determination letter program provided assurance to plan sponsors that their retirement plan documents—whether the plans were defined benefit, money purchase, cash balance, profit sharing, ESOP or 401(k)—met the Internal Revenue Code's qualification requirements.

Plan qualification is essential for a number of reasons. Private sector employers may deduct employer contributions to qualified plans from their taxes. Contributions and earnings to qualified plans avoid taxation until they are distributed to plan participants. Employees can make pre-tax contributions to qualified 401(k) plans and tax-free rollover distributions to individual retirement accounts and other eligible retirement plans. These advantages make qualified plan status very attractive to both employers and employees.

IRS determination letters have been critical in providing assurance to plan auditors, investment managers, lenders, third-party administrators, unions and buyers of companies that a retirement plan meets the Internal Revenue Code's qualification standards. Determination letters have allowed auditing, collective bargaining agreement negotiations, plan administration, initial public offerings, lending transactions, plan investments and mergers and acquisitions to proceed with confidence about a plan's tax-qualified status. Without a determination letter program or some other way to demonstrate a plan's tax-qualified status, plan sponsors and retirement plan participants may face a number of challenges and additional costs in undertaking these activities.

Operational compliance is also critical for retirement plans. If the IRS discovers an operational failure during an audit, the qualified plan will be subject to sanctions based on the facts and circumstances of the particular failure or failures. Factors considered in determining the amount of a sanction include the steps taken by the plan sponsor to prevent failures, the steps taken by the plan sponsor to identify failures that may have occurred and the extent to which correction of a failure has progressed before the IRS began its examination of the plan. Early identification and correction of any operational failures will also be evidence of the plan sponsor's reasonable efforts to comply with the Internal Revenue Code in actual plan operation.

In recognition of the ongoing uncertainty and risk created by the termination of the determination letter program, Ice Miller LLP has introduced its Qualified Plan Comply Now Program. Comply Now is designed to assist employers with their continued retirement plan compliance needs through a comprehensive review of the plan in form and, upon request, plan operation. Any required amendments needed for continued qualification will be identified, and if timely adopted, Ice Miller will issue a letter stating the plan document complies with all applicable IRS requirements for plan qualification in form. While a letter issued under Comply Now is not binding on the IRS or other third parties, it will serve a critical role in demonstrating good faith efforts by a plan sponsor to maintain its plan's tax-advantaged status in both form and operation. Employers can visit icemiller.com/comply-now/ for more information about Comply Now.

Tara Schulstad Sciscoe is a partner in the Employee Benefits Group of Ice Miller LLP. She advises employers, plans and trusts with respect to the design and compliance of their employee benefit programs, including their retirement plans, deferred compensation plans, health and welfare plans, severance plans, early retirement programs, executive compensation programs, tuition remission and fringe benefit plans, and phased retirement programs. She may be contacted at tara.sciscoe@icemiller.com or 317-236-5888.

This publication is intended for general information purposes and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstance. Ice Miller will not provide services under Comply Now unless specifically requested by the reader to do so. The actual terms of any engagement under Comply Now will be set forth in a separate writing.
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