Compliance Issues for Pension Plans after the Change to the Determination Letter Program T. Katuri Kaye, Trucker Huss, San Francisco, CA Sharon Goodman, Slevin & Hart, Washington, DC On June 29, 2016, the Internal Revenue Service ( IRS ) issued Revenue Procedure 2016-37 ( RP 2016-37 ) (copy attached), which provides much anticipated guidance after the IRS s initial announcement in Announcement 2015-19 that the five year remedial amendment cycle for individually designed retirement plans would end effective January 1, 2017. The following is a summary of: (1) the background on the prior determination letter program; (2) the structure of the compliance program under RP 2016-37; and (3) compliance issues for pension plans after the change to the determination letter program, as outlined in RP 2016-37, in order to assist plan sponsors with respect to their new, current and terminating retirement plans requirements. I. The Five Year Remedial Amendment Cycle Before 2017 A. In General Although not required, plan sponsors of individually designed plans have historically relied on favorable determination letters as proof that their applicable plan documents satisfied certain documentary requirements to be tax-qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended ( Code ). For plan sponsors, a favorable determination letter generally provided assurance that an audit by the IRS would not uncover any plan document defects as to the form of the plan. However, a determination letter generally did not provide protection against a plan s failure to operate in compliance with the qualification requirements. B. Staggered Remedial Amendment Period Program From 2007 to 2017 In Revenue Ruling 2007-44 ( RP 2007-44 ), the IRS established new procedures under which determination letters were issued in a staggered remedial amendment period system utilizing regular, five-year cycles ( Cycle ) under Code Section 401(b) for plan amendments and determination letter renewals for individually designed plans, and six-year remedial amendment cycles for pre-approved plans (i.e., master and prototype and volume submitter plans). 1 This system was intended to allow the IRS to better manage its workflow related to remedial amendments 2. Prior to this five-year remedial amendment cycle system, plan sponsors generally requested determination letters on an ad hoc basis. The staggered five-year determination letter program assigned plan sponsors of individually designed qualified retirement plans to a remedial amendment Cycle A through E, based on the last digit of the plan sponsor s employer identification number (with certain exceptions). Each Cycle had a twelve-month submission period that began on February 1st and ended on January 31st of the applicable Cycle, in which to request an on-cycle favorable determination letter. The first five-year remedial amendment cycle was the remedial amendment cycle for compliance 1 Although RP 2016-37 discusses the impact of these changes on pre-approved plans and governmental plans, those topics will not be addressed in this paper. 2 See Rev. Proc. 2007-44, 2007-28 I.R.B. 54 (June 13, 2007) and Rev. Proc. 2011-49, 2011-44 I.R.B. 608 (Oct. 5, 2011). 1
with the Economic Growth and Tax Relief Reconciliation Act of 2001 ( EGTRRA ) and began on February 1, 2006 (Cycle A) and ended on January 31, 2011 (Cycle E). The IRS also extended the remedial amendment period for EGTRRA until the end of the initial five- or six-year remedial cycle. This extension did not waive or extend adoption requirements of timely good faith EGTRRA plan amendments or other amendments required as a condition of eligibility for the EGTRRA remedial amendment period 3. The most recent five year Cycle for individually designed plans, for compliance with the Pension Protection Act of 2006 and other laws, during which individually designed plans must be submitted to the IRS for a determination letter is as follows: Type of Plan Cycle Deadline Single Employer Plan-Sponsor s EIN last digit 1 or 6 A 1/31/12 Single Employer Plan-Sponsor s EIN last digit 2 or 7 B 1/31/13 and Multiple Employer Plans Single Employer Plan-Sponsor s EIN last digit 3 or 8 C 1/31/14 Single Employer Plan-Sponsor s EIN last digit 4 or 9 D 1/31/15 and Multiemployer Plan Single Employer Plan-Sponsor s EIN last digit 5 or 0 E 1/31/16 Governmental Plan 4 C 1/31/14 C. The Cumulative List As part of the Cycle program, the IRS annually published a Cumulative List of Changes in Plan Requirements ( Cumulative List ) that identified the changes in the qualification requirements that must be taken into account in the written plan document. When a plan filed for a determination letter in its designated cycle, the IRS then reviewed the plan for the items on the Cumulative List. For example, Notice 2012-76 contains the 2012 Cumulative List for submissions beginning February 1, 2013, and Notice 2013-84 contains the 2013 Cumulative List for submissions beginning after February 1, 2014 5. In addition, the IRS also considered all qualification requirements in effect before the issuance of the Cumulative List. However, the program did not impact any interim amendments required when there were statutory or regulatory changes with respect to plan qualification requirements that impacted provisions of the written plan. The deadlines for adoption of these interim amendments followed the remedial amendment period rules in effect under Treasury Regulation section 1.401(b)-1. If interim amendments were timely adopted, RP 2007-44 extended the remedial amendment period to the last day of the plan s five- or six-year remedial amendment cycle. The extension applied to the adoption of an interim amendment to comply with a qualification requirement or to the absence of a required provision where the plan sponsor determined in good faith before the interim amendment deadline that no amendment was required. The program also did not impact the deadline for adoption of a discretionary amendment, such as a benefit formula change, which is considered timely if adopted by the end of the plan year in 3 See Notice 2001-42, 2001-30 I.R.B. 70 (July 23, 2001), as modified by Rev. Proc. 2005-66, 2005-37 I.R.B. 509 (Sept. 12, 2005), as superseded by Rev. Proc. 2007-44, 2007-28 I.R.B. 54 (June 13, 2007). 4 Revenue Procedure 2012-50 offered governmental plans the option to elect Cycle E instead of Cycle C. 5 See Notice 2012-76, 2012-52 I.R.B. 775 (Dec. 7, 2012) and Notice 2013-84, 2013-52 I.R.B. 822 (Dec. 23, 2013). 2
which it was effective. II. Elimination of Staggered Five-Year Remedial Amendment Cycle Effective January 1, 2017, the IRS eliminated the staggered five-year remedial amendment cycle system for individually designed retirement plans. With the IRS s elimination of the five-year remedial amendment cycle system under RP 2016-37, plan sponsors are no longer permitted to apply for a favorable determination letter once every five years. Further, the last Cycle that was permitted to file under the prior system was Cycle A (for plan sponsors with employer identification numbers ending in 1 or 6), which began on February 1, 2016, and ended on January 31, 2017. Furthermore, controlled groups and affiliated service groups that maintained one or more plans were also permitted to submit determination letter applications for such plans during Cycle A in accordance with any prior Cycle A elections. III. Determination Letter Requests on or after January 1, 2017 A. Limited Access to Determination Letter Program The elimination of the staggered five-year remedial amendment cycle system for individually designed retirement plans means that plan sponsors of such plans now have limited access to the determination letter program effective January 1, 2017. Specifically, RP 2016-37 provides that a plan sponsor may submit an application for a favorable determination letter for its retirement plan s initial qualification using the Form 5300 (Application for Determination for Employee Benefit Plan), provided that a favorable determination letter must have never been issued for the applicable retirement plan, including any favorable determination letter issued pursuant to that Form 5307 (Application for Determination for Adopters of Modified Volume Submitter Plans). In addition, RP 2016-37 provides that an application for a favorable determination letter may be filed by a plan sponsor in connection with the termination of its retirement plan using the Form 5310 (Application for Determination for Terminating Plan), provided that the filing must be made no later than the later of (i) one-year from the effective date of the plan s termination, or (ii) one-year from the date on which the action terminating the plan is taken, but in any case not later than twelve-months after the date that substantially all plan assets have been distributed in connection with the plan termination. Finally, RP 2016-37 provides that the IRS will consider other circumstances other than initial qualification or plan termination, in which an application for a favorable determination letter may be submitted. To date, the IRS has yet to identify such other circumstances; however, it has indicated that it will consider several factors when making this consideration, including, but not limited to, significant law changes, new approaches to plan design, the inability of certain retirement plans to convert to a pre-approved plan document and the IRS s case load and resources available to process determination letter applications. B. Scope of IRS Review of Determination Letter Requests 3
RP 2016-37 provides that, for any individually designed retirement plan that is permitted to submit an application for a favorable determination letter under the new program, the IRS s review will be limited to the Required Amendments List (described below) issued during the second calendar year preceding the submission of the application, and any previously issued Required Amendments Lists (and IRS annual Cumulative List issued prior to 2016). In addition, a terminating plan will be reviewed by the IRS for any amendments required to be adopted in connection with plan termination (discussed below). Moreover, the IRS s review of any retirement plans that are submitted for initial qualification in 2017 will be based on the 2015 Cumulative List. Individually designed retirement plans (except terminating plans) must be restated to incorporate all previously adopted amendments when a determination letter application is submitted. C. Reliance on a Favorable Determination Letter Effective January 4, 2016, any favorable determination letters issued by the IRS to sponsors of individually designed retirement plans will no longer contain expiration dates, and any expiration dates contained in determination letters issued prior to January 4, 2016, are eliminated. RP 2016-37, provides that plan sponsors may rely on their retirement plans existing determination letters for any plan terms that are not added, amended or affected by a law change. However, a plan sponsor may not rely on an existing determination letter with respect to any plan provision that is subsequently amended or is subsequently affected by a change in the law postdetermination letter. IV. Plan Amendments Guidance on or after January 1, 2017 A. Elimination of Interim Amendments RP 2016-37 provides that plan sponsors of individually designed retirement plans are no longer required to adopt interim plan amendments with adoption deadlines on or after January 1, 2017. B. Extension of Remedial Amendment Period RP 2016-37 also provides a new approach to the remedial amendment period, based on whether or not the amendment relates to a disqualifying provision of the plan or if the plan is being terminated. (1) Disqualifying Provisions A disqualifying provision generally is a provision, or the absence of a provision, in a new plan or an amendment to an existing plan that causes the retirement plan to fail to satisfy the requirements of the Code as of the date the plan or amendment is first effective. In addition, a disqualifying provision includes any plan provision that has been designated by the IRS to be a disqualifying provision by reason of a change in those requirements. Effective for any disqualifying provision that was first effective on or after January 1, 2016, RP 2016-37 provides for an extension of the remedial amendment period for individually designed 4
retirement plans. The deadline for a plan sponsor to adopt an amendment to an individually designed retirement plan (excluding a governmental plan) with respect to any disqualifying provision is generally the date on which the remedial amendment period (described below) expires, unless otherwise provided by statute, regulations or other guidance. For a new retirement plan (excluding a governmental plan), the remedial amendment period expires on the later of (i) the fifteenth day of the tenth calendar month after the end of the plan s initial plan year or (ii) the modified Code Section 401(b) expiration date. If the plan sponsor is not a tax-exempt entity, then the modified Code Section 401(b) expiration date generally is the due date for the employer s income tax return or partnership return of income, determined as if the extension applies. If the plan sponsor is a tax-exempt entity, then the modified Code Section 401(b) expiration date generally is the due date for the Form 990 series, determined as if the extension applies or, if no Form 990 series filing is required, the fifteenth day of the tenth month after the end of the employer s tax year (treating the calendar year as the tax year if the employer has no tax year). For an existing retirement plan (excluding a governmental plan), the remedial amendment period for a disqualifying provision that is not on the Required Amendments List generally expires on the last day of the second calendar year following the calendar year in which the amendment is adopted or effective, whichever is later. However, the remedial amendment period for a disqualifying provision related to a change in qualification requirements which is on the Required Amendments List generally ends on the last day of the second calendar year following the year the list is issued. Moreover, the remedial amendment period for any disqualifying provisions identified in RP 2007-44 that were set to expire on December 31, 2016, has been extended to December 31, 2017, except for any disqualifying provision contained on the 2016 Required Amendments List. The remedial amendment period for a disqualifying provision on the 2016 Required Amendments Lists ends on the last day of the second calendar year that begins after the issuance of the Required Amendments List. (2) Discretionary Amendments The deadline for a plan sponsor to adopt a discretionary amendment (generally, any amendment not related to a disqualifying provision) to an individually designed retirement plan (excluding a governmental plan) is the end of the plan year in which the amendment is operationally put into effect, unless otherwise provided by statute, regulations or other guidance. An amendment is operationally put into effect when the plan is administered in a manner consistent with the intended plan amendment (rather than existing plan terms). This generally is the current rule applicable to the deadline for discretionary amendments under Code Section 401(b) except in the case of amendments that reduce or eliminate benefits. (3) Required Amendments at Plan Termination A plan sponsor s termination of an individually designed retirement plan generally ends the plan s remedial amendment period. As a result, retroactive remedial plan amendments or other 5
required plan amendments for a terminating plan must be adopted in connection with the plan termination even if such amendments are not on the Required Amendments List. This means that a plan sponsor should include all required amendments with its Form 5310 filing. V. New Annual IRS Lists A. Annual Required Amendments List In order to facilitate compliance with the new determination letter program, RP 2016-37 provides that the IRS intends to publish an annual Required Amendments List beginning with changes in qualification requirements that become effective on or after January 1, 2016. The Required Amendments List will establish the date that the remedial amendment period (described above) expires for changes in qualification requirements contained on the list. In general, an item will appear on a Required Amendments List after guidance with respect to that item (including any model amendments) has been provided in regulations or in other guidance published in the Internal Revenue Bulletin, except as otherwise determined at the discretion of the IRS. On December 27, 2016, the IRS issued Notice 2016-80, which contains the 2016 Required Amendments List ( 2016 RA List ). The 2016 RA List has two parts. Part A addresses changes in qualification requirements that generally require an amendment to most plans or to most plans of the type affected by the change. Part B addresses changes in qualification requirements that the Department of Treasury and the IRS anticipate will not require amendment to most plans but may require amendment to a particular plan due to a unique plan provision. Under Part A of the 2016 RA List, the IRS provides that there are no changes in qualification requirements first effective in 2016 that generally require an amendment to most plans or most plans of a certain type by December 31, 2018. Under Part B of the 2016 RA List, the IRS provides that collectively-bargained defined benefit plans must be amended by December 31, 2018, to incorporate restrictions on accelerated distributions from underfunded single-employer plans in employer bankruptcy under Code Section 436. B. Annual Operational Compliance List Although the deadline for amending an individually designed plan retroactively to comply with a change in plan qualification requirements is the last day of the remedial amendment period (described above), a plan must be operated in compliance with a change in qualification requirements as of the effective date of the change. To assist plan sponsors in achieving operational compliance, RP 2016-37 further provides that the IRS intends to issue an annual Operational Compliance List to identify changes in qualification requirements that are effective during a calendar year. Plan sponsors remain responsible for complying with all relevant qualification requirements, even if the requirement is not included on an Operational Compliance List. To date, the IRS has not issued its first Operational Compliance List. VI. Next Steps for Plan Sponsors of Individually Designed Retirement Plans 6
In light of the changes to the determination letter program, as outlined in RP 2016-37, it is more important than ever that plan sponsors who continue to maintain individually designed retirement plan documents keep their plans in compliance. Specifically, plan sponsors that were not Cycle A filers are recommended to review their plan documents for compliance with requirements on Cumulative Lists issued after their previous determination letter application was filed. Furthermore, when an annual Required Amendments List is issued, plan sponsors should have a review process in place to assess compliance and determine whether amendments are needed, and if so, the applicable remedial amendment period. Similarly, a review process should be in place for when an annual Operational Compliance List is issued. Furthermore, a plan sponsor that is either establishing a new individually designed retirement plan or terminating an existing individually designed retirement plan, should determine whether plan amendments are required and the timing to request a determination letter, if available. An annual review is also recommended to assess whether the IRS is accepting determination letter applications for other circumstances, and, if so, whether the individually designed retirement plan satisfies the requirements to submit a determination letter application. Finally, it is important that plan sponsors of individually designed retirement plans update their administrative procedures to monitor compliance with plan document and other qualification requirements in the absence of a favorable determination letter and keep good records. Consideration should also be made on the impact of these changes to the representations made by plan sponsors in mergers and acquisitions, the annual benefit plan audit, record-keepers, custodians, auditors and other plan service providers, investment vehicles that limit eligibility of investors to tax-qualified plans, and federal agencies (such as the Department of Labor, Securities and Exchange Commission and Pension Benefits Guaranty Corporation), among other things. Where applicable, plan sponsors should consider correcting any errors under the IRS s Employee Plans Compliance Resolutions System. 7